Fed Announces QE3
Matthew Martin 9/13/2012 09:39:00 PM
On another note, one of the most interesting, and perhaps most promising features of the announcement was what it didn't include: an end date. Instead the Fed adopted a more conditional tone:
"If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability."But that's not all--they went on to include this amazing little addendum:
"...the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens."This sounds like the committee attempting to take Mike Woodford's advice, if extremely cautiously--they are trying to build up expectations of sustained expansionary monetary policy in the future, which will in theory boost the economy now by way of the expectations mechanism. Scott Sumner even thinks that this language is an intermediate step towards the Fed adopting an NGDP target for monetary policy guidance.
As for the efficacy of the policy, one notable event stands out in my mind:
This chart shows that inflation expectations rose modestly after the announcement. Given the depressed state of the economy and the zero-lower-bound on nominal interest rates, this is actually a very good sign, since higher expected inflation means that real interest rates will fall, leading to higher GDP and employment. Moreover, it means that the Fed's attempt to stimulate through the expectations channel seems to be working already.
I have one final comment: I don't understand how anyone can accuse Bernanke of playing politics with this decision. First, these same people claim that QE3 will hurt the economy, which means that they should think that the Fed's move will help them beat Obama and the democrats. Second, Bernanke is a republican, former chair of Bush's council of economic advisors and appointed to the Fed by Bush--why would he want to help the democrats? Third, Bernanke doesn't control monetary policy--this is up to the FOMC, on which Bernanke has only a single vote. Finally, I'd venture to guess that most of the members of the FOMC are also republicans, who would not be interested in helping Obama or the democrats. They are, however, very much interested in helping the economy, which is the only reason they supported QE3.