Dramatic pre-election action from an activist Fed

The FOMC also augmented its "forward guidance" on the path of the funds rate in important ways, presumably to meet objections that its conditional pledge to hold rates low was not sufficiently credible. Beyond merely extending the anticipated zero rate period from "late-2014" to "mid-2015," the FOMC removed the conditionality it had been attaching to the calendar date.

Gone was the old caveat that "economic conditions — including low rates of resource utilization and a subdued outlook for inflation over the medium run — are likely to warrant exceptionally low levels for the federal funds rate...." Now the FOMC is stating bluntly that it expects to keep the funds rate near zero "at least through mid-2015."

What's more, the FOMC said it "expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens."

In case there were any doubts about the Fed's intentions, Bernanke told reporters the FOMC has an "obligation" to continue using its various policy tools until it sees "substantial" labor market improvement. “We will be looking for the sort of broad based growth in jobs and economic activity to signal sustained improvement in labor market conditions and sustaining employment," he said, maintaining that low inflation allows the Fed to do that.

Even if inflation rises above the 2% target, the FOMC will not necessarily desist, he implied. In that event, the FOMC will "take a balanced approach," he said. "We bring inflation back to the target over time, but we do it in the way that takes into account the deviations from both of their targets."

Why did the FOMC take these dramatic steps?

Well, the FOMC explained its action by saying it was "concerned that, without further policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions."

Many will point to the dismal August employment report, with its meager 96,000 non-farm payroll rise; 41,000 downward revision to prior months and 368,000 plunge in labor force participation, or to Bernanke's Aug. 31 speech in Jackson Hole, where he expressed "grave concern" about "the stagnation of the labor market" and vowed to "provide additional policy accommodation as needed."

But the Sept. 13 decision was not a result of one month's jobs data, ugly as they were. Nor did it happen because Bernanke had a sudden epiphany in the shadows of the Grand Tetons. It was the culmination of a series of disappointments going back months.

Remember that, as the year started, the labor market seemed to be on the mend. From December through February, payrolls rose an average 245,000 per month. But Bernanke was skeptical, warning in March that "further significant improvements ... will likely require a more-rapid expansion of production and demand..."

His Okun's Law-based fears that the economy wasn't growing fast enough to reduce unemployment soon were realized. In March, payroll gains dipped to 143,000 and then decelerated even more sharply — to 68,000 in April, 87,000 in May and 45,000 in June.

The July employment report, released a couple of days after the FOMC decided on Aug. 1 to stay on hold and take "more time" to assess the impact of the renewed "Operation Twist" bond-buying program, was seen as encouraging by officials who were uncertain about whether more easing was needed when it showed non-farm payrolls rebounding by 163,000. But less than a week before the FOMC convened in September, that number was revised down to 141,000, and the 96,000 August rise suggested a return to the dreary pre-July pattern.

And the FOMC was convinced that the outlook wouldn't be much better unless it did more to cushion the economy against downside risks from the fiscal cliff and Europe. As they performed their quarterly ritual of revising their three-year economic projections and federal funds rate forecasts, Federal Reserve Bank Presidents and Fed governors did not see much improvement on the horizon.

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