Monday, April 18, 2011

Should the Fed's Expansionary Policies Be Ended?

No, but they should be more systematic. The problem with the QEs all along is that they have been rather ad-hoc and unpredictable.  This has made them less effective and politically polarizing.  Imagine how different the Fed's monetary stimulus would have been had they adopted an explicit target, preferably a nominal GDP level target.  Such an approach would have given them the freedom to do really aggressive 'catch-up' monetary easing until nominal GDP returned to the targeted trend while at the same time ensuring long-term predictability.  It also would be viewed (correctly) as constraining the Fed's power.

Instead we are stuck with the problematic QE programs that have been at best mildly effective and as result, are an easy target for critics. Thus, it is no surprise to learn from Robin Harding of the FT that the Fed is about to signal the end of monetary easing:
An end to global monetary policy easing is on the horizon, with the US Federal Reserve set to signal it will cease asset purchases at the end of June.

When the rate-setting Federal Open Market Committee meets on April 27, it is unlikely to limit its options by ruling out asset purchases beyond the second $600bn “quantitative easing” programme – or “QE2” – that is due to finish by the end of the second quarter.

Fed officials, however, know that announcing more asset purchases at the last minute would disrupt markets. Silence on a follow-up “QE3” at next week’s meeting would therefore signal that their current intention is to complete the $600bn QE2 programme and then stop.
One reason the Fed is contemplating this is because the QE programs have not delivered a robust recovery  and have become a political minefield.  This does not mean monetary policy could not do more if done right.  There is still evidence of excess money demand problem that the Fed could meaningfully address through a nominal GDP level target. With U.S. fiscal tightening nearing and Eurozone problems lingering, the Fed needs a nominal GDP level target now more than ever.


  1. Crickey-almighty, now is not the time to prove your inflation-fighting rectitude. Core inflation is just over 1 percent, and some say the CPI overstates inflation.

    The economy is just now gaining steam.

    I sure would like to try NGDP targeting. I wonder if Bernanke has ever written about this topic.
    It is too bad there is a healthy, but misplaced suspicion today of anything the federal government says or does.

    I guess there is a civics lesson there--lying to the public, in peacetime, wartime or any other time, is always bad policy. Set limited goals, and hit them.

  2. Your title made me laugh. Your post almost made me cry.

    We seem to be slowly and deliberately jamming ourselves into a nice little nook where the only ways out are black hole or supernova.