As the US economy slowly drags itself from the mire of the deepest economic downturn since the 1930s Great Depression, the US Federal Reserve will do all in its power to sustain the recovery to the point where it sees the unemployment rate falling to 6.5 per cent.

That is message from the Federal Open Markets Committee of the Fed as it maintained its quantitative easing program at $US85 billion of bond purchases per month and reiterated its objective of keeping "exceptionally low” or near zero interest rates in place until 2015 or at least until the unemployment rate falls. The Fed is confident inflation will remain low which is an outlook that allows it to turn its policy focus on the jobs market.

This is a further nuanced change in objective for the Fed, with Chairman Ben Bernanke bringing the policy focus ever closer to conditions in the labour market. In the statement issued after the FOMC meeting, Bernanke said, "Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee remains concerned that, without sufficient policy accommodation, economic growth might not be strong enough to generate sustained improvement in labour market conditions. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook.”

To meet these objectives, the Fed reiterated its plan to purchase around $US40 billion of mortgage backed securities per month and it effectively extended its "operation twist” into 2013 by saying that it will buy longer dated bonds at a rate of around $US45 billion a month. Bernanke was at pains to suggest that this did not add to the monetary stimulus, it merely maintained the stimulatory policy setting announced in September.

The Fed’s objective is clear and explicit: "these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative”.

Monetary policy remains super-stimulatory and it is because the economic and banking crisis in the US of recent years was the most acute threat to the economy since the 1930s Great Depression and the hangover being experienced at the moment reflects that.

It has been more than six years since through the year growth in GDP was above 3 per cent, a sign of the uninspiring economic recovery. At the moment, the output gap as measured by industrial capacity utilisation and the labour market is huge. It is so huge that the US economy could grow by 4 per cent for three straight years and only then just close the output gap and be close to full employment. Don’t get excited, no one thinks 4 per cent GDP growth is on the cards any time soon.

The fact that Bernanke and the Fed have been able to engineer an economic scenario in this current slice of economic history where the peak unemployment rate was 10 per cent and deflation was avoided is remarkable. Bold policy settings have yielded fantastic returns for an economy that in 2008 was on the brink of collapse.

In terms of some other specifics, the Fed forecasts for the US economy contain no surprises. GDP growth in 2013 is expected to be in a 2.3 to 3 per cent range, the unemployment rate in a 7.4 to 7.7 per cent range while inflation is forecast to remain entrenched below 2 per cent, possible as low as 1.3 per cent. If these forecasts come to fruition, it would be a good rather than a great result and there is no doubt the Fed itself and those in the market would be delighted if the economy out-performed these cautious forecasts.

The markets reacted reasonably positively to the Fed action with US stocks up a little although off their highs for the day and bond yields also rose on the outlook for respectable economic growth. The US dollar was again pushed lower dropping to around 1.31 against the euro while the Australian dollar jumped to 1.0570.

While it is clearly premature to spend too much time looking at how the Fed will exit its QE program without derailing the economy, our own RBA Governor Glenn Stevens was speaking in Thailand yesterday on the blurring of monetary and fiscal policy.

Stevens noted that central bank purchases of government securities not only gave support to the economy, but also lowered the debt servicing costs for governments and as a result, helped reduce fiscal deficits. In a Jerry Seinfeld moment, Stevens emphasised that "there is nothing necessarily wrong with that… but the problem will be the exit from these policies.”

Implicitly Stevens was unsure how high government bond yields would rise not only when there were no central bank purchases but especially when the central banks sold their massive bond holding into the market. Obviously yields would rise, which by definition would restrict economic growth and would boost the debt servicing costs and undermine the fiscal policy objectives of governments.

He has a fair point, but in the US, it is an issue that is not in focus as Bernanke and the Fed are more worried about economic and jobs growth in the next couple of years.

They are doing whatever it takes to grow the economy. The exit strategy from QE is a problem I am sure they would love to confront. It would mean the economy is growing at near full capacity and the unemployment rate would be low. It doesn’t mean that exit will be easy, but it is something that can be looked at another day.

Until then, the Fed is going for growth.

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So Stephen Kouk now admits that his "stiumulate at all costs" mantra will cause problems with the Fed and other Central Bankers try to offload their bonds on the free market...but that is not a concern now...just like the housing bubble that was forming after dotcom bubble was not an issue in USA circa 2003!
Seriously, how are any Keynesians still being listened to. They have pretty much admitted they cant fix this without longer term problems, but they still get so much airplay (Fed super stimulus shoots for growth, December 13).
The mess in the US (which went on to nearly tople or may still tople, the balance of global finance) was caused by greed & deception.
Surely Karma will eventually kick in...especially when they are trying to resolve their problem by ...wait for it....its very brave of them...its called MONEY PRINTING. (Fed super stimulus shoots for growth, December 13).
Stephen,
What if the economy is still weak and inflation takes off. This is the other trigger to remove monetary stimulus. Now that would give the fed something to think about. I suspect exiting QE under this scenario would not be a happy problem to confront, more so for the middle class. (Fed super stimulus shoots for growth, December 13).
If the US wanted to eliminate most unemployment they could simply have moved to 4 weeks annual leave per year. (Fed super stimulus shoots for growth, Stephen Koukoulas, 13 Dec 2012).
The loss of income to employees would be reduced by the incomes taxes not paid at the highest marginal rates. The loss of revenue to government would be ameliorated by lower unemployment benefits and other assistance.
The standard of living would probably go up in many non-financial terms.
Instead we have currency wars simply seeking to push the problem to other countries and unreal monetary policy (more designed to help banks make profits on carry trade in securities (borrow short & lend long), now profits on bonds (operation twist).
Wouldn't it be great if we couldn't afford to repay our loans we could go to another bank who would print the money they lend us and therefore afford to give us that money at a lower interest rate, because it didn't cost them anything (Fed super stimulus shoots for growth, December 13).
The US can't ever afford to stop printing because they could never afford the servicing costs.
They are just digging a deeper and depper hole for themselves. This certainlty isn't capitalism where the weak get taken over by strong. The banks should have been allowed to fail in 2007, the currency would have collapsed naturally and now they would be starting to see the light at the end of the tunnel.
A simple exit strategy is for the Fed to advice the issuer of the bonds (the US Government) there is no need to repay the bonds (Fed super stimulus shoots for growth, December 12). In effect cancel the bonds. Thus the US Government would suddenly be in a strong financial position and US Fed Reserve would suddenly have a huge loss. No problem, as the Fed Reserve has an unlimited supply of new, fresh, never used money.
This is a problem for Australia, and the AUD, at this time moreso than for the USD (Fed super stimulus shoots for growth, December 13).
Wow! The fed is now controlling mortgage markets & bond markets, via manipulating interest rates @ forcing "investors" to buy equities to chase yield (Fed super stimulus shoots for growth, December 13). Then add in rumours of an equities plunge protection team and suppression of gold prices by the fed or US Administration and what do you have left?
The politburo in the old USSR would be proud of this lot.
I hope they prove to be geniuses you think they could be Steven... or we are in lot of trouble
It seems the point has reached such that few are willing to buy US bonds except the central bank – in other words govt expenditure can only be largely funded out of printed money (Fed super stimulus shoots for growth, December 13).
It remains to be seen if there will be capital flights out of the US by the wealthy like in Greece. Gold bugs may well finally have their day.
Stephen, the covert side of this is that we are looking at one of the greatest scams ever perpetuated (Fed super stimulus shoots for growth, December 13).
Unlike the RBA, the FED is a private organisation largely owned by Wall Street institutions. It is printing money (officially sanctioned counterfeiting) to buy junk securities (mortgages, etc) from some of its own shareholders, thus saving their hides.
In return these FDA shareholders are lending the "counterfeited" money they receive for their junk to the US government, for which read the general public. The public are thus paying interest on this 'dirty' money to these institutions, which means these leeches have gained both ways.
Talk about a degenerate society!
"While it is clearly premature to spend too much time looking at how the Fed will exit its QE program without derailing the economy..." shows a distinct lack of planning, and highlights the carefee attitude toward monetary policy that got us into this mess in the first place (Fed super stimulus shoots for growth, December 13).
Stephen, well put. All problems must be contextualised (Fed super stimulus shoots for growth, December 13).
Why defer solving problem A, because the miasmic effects, might cause problem B, to become difficult.
Thats what I love about the USA. They will solve problems, even if the solution is not ideal.
The FED, is the only central bank left that still understands their mandate and that is to make money.
Anyone care to disagree?
"They are doing whatever it takes to grow the economy" (Fed super stimulus shoots for growth, December 13.)
Yes indeed aren't they Stephen. Over 85 billion a month in Federal Reserve purchases. Just keep on piling the debt on top of existing debt and voila ! we get a growth led recovery.
This madness pure and simple – not sound economic practice.
A nice piece of spin but I ain't buying it (not even with confetti like US dollars!)
Ken McAlpine, The Feds original mandate was to protect the purchasing power of the US dollar. Since 1913 the US dollar has lost more than 97% of its value, the trend is still intact (Fed super stimulus shoots for growth, December 13).
The US Fed (a private company owned by Wall Street) has been an abject failure to the American People.
Some wiser heads have proposed auditing and ending the Fed....which would be the first step in the USA towards a genuine recovery.
Until then the Fed policies as expounded by Ben Bernanke will eventually be the ruin of a once great country.
Nothing has changed for the better.