The Federal Reserve dropped a bombshell today, announcing that it would spend $45 billion a month on bond purchases to keep interest rates low, and that it would keep its short-term rates near zero as long as it takes to get unemployment below 6.5%. It will also keep up its current practice of spending $40 billion a month on mortgage bonds, the AP reports, bringing its total monthly spending to $85 billion, and growing its now almost $3 trillion portfolio.
This is a "historic move" that "will change how we think about Fed policy, yet again," writes Sudeep Reddy at the Wall Street Journal. Instead of pegging its targets to specific time frames, the Fed is now tying its policies to specific economic outcomes. The policy is sometimes referred to as the "Evans rule," because Chicago Fed President Charles Evans has been pushing for it for months. The Fed is also sending a strong, loud signal that it's willing to allow inflation to rise if that's what it takes to reduce unemployment.