Now we know the new Fed goals. Bernanke has been willing to try almost anything to solve the slow growth problem which in reality may be out of his control. Unemployment has to get down to 6.5% from the current 7.7% and inflation has to be no more than 2.5% one or two years in the future.
The monthly buying program was increased to $45 billion Treasuries from "just" $40 billion in mortgages per month. So now the Fed will be growing its balance sheet each month by $85 billion, over $1trillion in a year. The Fed balance sheet in total was just under $1 trillion just a few years ago, now it will be growing by that amount in 12 months. By 2015, the balance sheet will be close to $5 trillion.
The doves are in control, or so it seems. More interesting is the fact that this combination of policy is a variation of the Taylor Rule that some would say the Fed has been following for the last two decades. The differences is that there will be more weight on the unemployment portion and the inflation target will be higher. The most interesting part of this view is that it actually creates new uncertainty. What happens if the tamed inflation of today actually reaches 2.5% before the unemployment rate hits 6.5%. Alternatively, what will happen if unemployment does hit 6.5%? Will we see the fed reverse policy. Clarity actually can increase the number of questions that investors may have.
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