Should the FOMC Indicate Economic Thresholds for Reducing and Ending QE3?

The FOMC might have been more effective by specifying the economic conditions at which the Fed will begin to step back from and ultimately end its bond-buying program (QE3) instead of indicating a possible timeframe.

For example, the Fed might have indicated they could begin to reduce their bond-buying when the unemployment rate declines to 7.4% and conclude buying when unemployment falls below 7.0%.  Perhaps a reference to inflation could also be included.  They have already identified such conditions regarding future plans for the federal funds rate, so such an approach for QE3 would be consistent with existing practice and facilitate their efforts for transparency.

Instead Chairman Ben Bernanke has opted to indicate they could reduce buying over “the next few meetings” and conclude QE3 by mid-2014 depending on economic conditions.  This has left market participants more focused on the timing, which many believe is now sooner than they expected, and either guessing what the FOMC means by “until the outlook for the labor market has improved substantially” or completely forgetting that any reductions in buying are conditional.  Economic targets would let investors and traders make their own estimates of timing, which in turn might have mitigated the severe reactions in the financial markets.

As a result, the FOMC may have triggered panic selling and inadvertently caused the markets to undo the expressed goal of QE3, which is  to “maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative”.

Federal Reserve issues FOMC statement

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