The Federal Reserve did not need to do this. Its dual mandate, to ensure full employment and combat inflation, pointed it in different directions. Political pressure against taking action – with a vocal faction within the Republican party now opposing the Fed’s very existence – was intense. And yet, with only one dissent, chairman Ben Bernanke pushed through what should be seen as a stunningly aggressive set of measures.
The Fed could have been specific or open-ended in its commitment to expanding its balance sheet. In the event it was both; it promised to buy $40bn in mortgage-backed securities each month until the labour market improves “substantially”. The definition is left to the Fed, but with unemployment at 8.1 per cent, purchases will probably carry on until it falls below 7 per cent. This is an open-ended commitment to print money.
Not only this, but the Fed has committed to leaving its target interest rate at virtually zero until mid-2015. This will keep two-year yields at virtually zero. And it will continue with Operation Twist, using the proceeds from the maturing of its shorter-dated bonds to buy longer-dated securities.