Hat Tip: Nancy M.
The Federal Reserve (that is, the FOMC – Federal Open Market Committee) last week gave us an open-ended quantitative easing policy. Most of the world thought they would only give us QE3, and more than a few observers expressed surprise that the Bernanke-led Fed decided not only to continue Operation Twist at its current level but also to buy an additional $40 billion a month of agency mortgage bonds. This latter easing policy will continue “(i)f the outlook for the labor market does not improve substantially…”
This rather prodigious easing will total some $85 billion per month for the rest of the year and almost $500 billion a year, for some time to come. My first thought upon reading the post-meeting communiqué and Bernanke’s press release was, what exactly defines the policy? What is an acceptable rate of unemployment? This is not merely an academic question because, as we have noted in past letters, it is going to be quite some time before unemployment dips below 6%, and to reach that level will take a much healthier economy than the one in which we are mired.
The balance sheet of the Federal Reserve is now at a mind-numbing $1.5 trillion. Bernanke proposes to raise that by a half trillion dollars every year until we reach whatever is deemed an acceptable rate of unemployment, as long as it is “achieved in a context of price stability.” And while Bernanke argued many years ago for a 2% inflation target, there has been no real line in the sand as to what the current target should be and what is an acceptable rate of inflation in an age of very high US indebtedness, not to mention high unemployment.
And so the Fed has embarked upon a course of extraordinary quantitative easing – or printing money, in the vulgar parlance of those of us back in the cheap seats. And it is doing so in the face of a growing chorus of economists who are clearly seated in first class and who are hollering that more QE will not have any effect upon employment and may even do more harm than good.
Isn’t that special?