QE3 and beyond: $85 billion per month and counting

Combined with the $40 billion monthly MBS purchases, the Fed will be doing $85 billion per month of "quantitative easing" — indefinitely. At that rate, the Fed's balance sheet will rise by a third to roughly $4 trillion this year.

 And the Fed could do even more, judging from the signals Bernanke and company have been sending.

Consider that, before the December meeting, relatively moderate St. Louis Fed President James Bullard was arguing that only $25 billion of the $45 billion expiring Twist purchases should be replaced with outright Treasury purchases — for a total QE3 of $65 billion — if the FOMC wanted to keep monetary policy "on an even keel." Bullard, who will be an FOMC voter this year, maintained that a dollar for dollar replacement, would amount to an "easier" monetary policy.

Revealingly, though, Bernanke told reporters "the amount of stimulus is more or less the same" and that the FOMC action was just "a continuation of what we said in September." He contended it is essentially irrelevant whether the Fed is financing bond purchases with new money creation or through short-term sales.  

By inference, if Bernanke does not think what the FOMC did in December constitutes an easing, that leaves room for additional easing in the future if he does not see "substantial" and "sustained" improvement in labor market conditions.

Other Bernanke comments pointed in the same direction.

The Fed chief stressed that the FOMC "intends to be flexible in varying the pace of securities purchases in response to information bearing on the outlook or the perceived benefits and costs of program."

True, Bernanke was somewhat symmetrical, saying that "if the economy's outlook gets notably stronger we would presumably begin to ramp down the level of purchases."

But throughout his news conference, he stressed the need to make "substantial" and "sustainable" progress in labor markets, which in turn would require faster economic growth. And he repeatedly warned of the potential economic damage from the fiscal cliff.

The Fed "couldn't fully offset" those negative effects, he said, but "on the margin we would try to do what we could. Perhaps we would increase a bit" the amount of quantitative easing. Noting the Fed has "innovated quite a bit in the last few years," Bernanke said, "it's always possible we can find ways to find support for the economy."

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