The Federal Open Market Committee announced a change in tactics today. The Fed plans to inject additional liquidity in the economy by buying long-term US Treasury securities using the payments of principal and interest it receives from its $2 trillion investment portfolio. All this liquidity makes borrowing cheaper because there is so much cash available to lend. Economists call this policy of very easy money “quantitative” because the Fed has already lowered the overnight interbank borrowing rate to 0%, which is as low as it goes.
The Fed’s reason for today’s change in monetary policy is that the economic recovery is faltering. “The pace of recovery in output and employment has slowed in recent months,” and “the pace of economic recovery is likely to be more modest in the near term than had been anticipated.” The Committee does not believe inflation is a threat and will keep the liquidity faucet wide open “for an extended period.” It must have been difficult to backtrack on its earlier optimism, but the Bernanke Fed is showing the courage to keep fighting the recession that so many have prematurely pronounced dead.