The limits of the unconventional

By G.I. | WASHINGTON

In an era when the word "policy" is usually closely followed by "paralysis", it's of some comfort that at least one organization is willing and able to move when circumstances require. Four weeks ago, the Federal Reserve had no inclination to act at its policy meeting June 20th. Then, America's employment figures turned down and the euro crisis hotted up. The result is that it has announced its seventh instalment of unconventional monetary policy since late 2008, when short-term interest rates fell, in effect, to zero. In its latest salvo, the Fed said it would purchase $267 billion of long-term bonds by the end of the year, paid for from the proceeds of sales of short-term bonds in its portfolio.

The move extends a programme, nicknamed Operation Twist, announced last autumn and due to expire this month, under which the Fed swapped $400 billion of short-term bonds for long-term ones. Previous unconventional initiatives have included purchasing bonds with newly created money (“quantitative easing”, or QE), reinvesting the proceeds of maturing bonds, and verbally committing to keeping rates near zero for ever longer periods. All are designed to drag long-term interest rates down in the hope of stimulating demand.