News Column

Monetary Expansion: Cohen Column

Sept. 18, 2012

Isaac Cohen

For the third time since the Great Recession of 2008-09, the Federal Reserve decided to adopt another set of monetary expansion measures. The main justification was the slowdown in economic growth, which again started in the spring and was reflected in a set of disappointing job creation figures, with low inflation.

The central bank decided to purchase more mortgage based securities and to maintain other ongoing programs to extend the maturity of its holdings of securities and continue reinvesting principal payments, It also promised to keep interest rates close to zero until mid 2015.

In a departure from previous expansionary measures, this time the purchase of mortgage based securities does not have an expiration date. Such purchases will last until "the labor market improves substantially." Furthermore, the expansionary posture will remain "for a considerable time after the economic recovery strengthens."

The purpose of the measures was clearly stated by Federal Reserve Chairman Ben Bernanke, in a press conference held after the end of the Open Market Committee meeting. He said, "We want to see more jobs . . . lower unemployment . . . a stronger economy that can cause the improvement to be sustained."

In the middle of the political campaign's final stretch, these measures immediately became part of the confrontation. Republicans criticized the measures, because they saw them as helpful for the reelection of President Obama. Democrats were consistently supportive. Markets worldwide reacted posting spectacular gains.

Bernanke pointed out that the Federal Reserve adopts its decisions based "entirely on the state of the economy."

Isaac Cohen is an international analyst and consultant, a commentator on economic and financial issues for CNN en Espaņol TV and radio, and a former director, UNECLAC Washington Office.

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Source: (c) 2012. All rights reserved.

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