Thursday, September 13, 2012

A Step in the Right Direction

The FOMC adopted open-ended QE today:
To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee agreed today to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month.... 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.
This is long-overdue and much needed. The efficacy, however, of this open-ended QE would be far more effective in shaping expectations had it been tied to an explicit target.  Doing so would also make the Fed more accountable for its actions.   Still, conditioning QE explicitly on the state of the economy is a vast improvement over past QEs. It also opens the door for eventually tying monetary policy to a NGDP level target.  One step closer to the goal Market Monetarists have been calling for since 2009. 

P.S. Michael Woodford and Scott Sumner reach a similar conclusion about the FOMC's decisions today.  See Joe Weisenthal for a good summary of the days events, including coverage of Chairman Bernanke's press conference and a cameo appearance by me. (Update: See Lars Christensen too.)

P.P.S.  Still don't undertand the point of managing expectations via a NGDP level target? Then check out Mike Konczal's entertaining Gifs tutorial.

P.P.P.S.  Never underestimate the power of blogging! (Even if tenure requires traditional academic publishing.)


  1. My prediction: this will do nothing and the fiscal cliff will send us into recession in Q1, which will show that monetary policy is ineffectual in a balance sheet recession.

  2. OhMy,

    If the FOMC does not get more explicit about its open-ended QE, you may be right. I hope, though, that the fiscal cliff gets worked out before we have to test the Fed's resolve.

  3. Given that Bernanke said today that he did not believe the Fed's tools were powerful enough to offset a fiscal shock, getting more explicit about it probably will not happen IMHO.

  4. There is no fiscal cliff. A fantasy made by agenda driven people.

  5. David
    I wasn´t too excited about it!

  6. Yes, I think an excellent step in the right direction.

    The blogosphere wins this one? Maybe. Stay tuned.

    I would prefer explicit and transparent targeting of NGDP and no IOR and many other things but open-ended QE is pretty good. I wish it was $100 billion a month of US Treasuries, but anyway.....

  7. Marcus, at least it is progress. But you are right to worry.

    Benjamin, glad to have had you along for the ride.