Playing with words

Donald Marron has a post where He argues that “Quantitative Easing” ended and “Quantitative Accommodation” began:

To get some inspiration, consider the three stages of traditional monetary policy. You know, the kind where the Federal Reserve moves short-term interest rates up and down:

  1. Cutting rates (easing)
  2. Keeping rates low (accommodation)
  3. Raising rates (tightening)

The Fed’s asset purchases will   go through three stages as well:

  1. Buying assets (quantitative easing)
  2. Owning assets (quantitative accommodation)
  3. Selling assets (quantitative tightening)

He notes that that´s Bernanke´s interpretation. “For example, here’s Chairman Bernanke discussing stocks and flows at his inaugural press conference in April”:

[W]e subscribe generally to what we call here the stock view of the effects of securities purchases, which—by which I mean that what matters primarily for interest rates, stock prices, and so on is not the pace of ongoing purchase, but rather the size of the portfolio that the Federal Reserve holds. And so, when we complete the program, as you noted, we are going to continue to reinvest maturing securities, both Treasuries and MBS, and so the amount of securities that we hold will remain approximately constant. Therefore, we shouldn’t expect any major effect of  that. Put another way, the amount of ease, monetary policy easing, should essentially remain constant going forward  from June.

If while the “water level in the bathtub was rising” nothing much happened to the real economy (output and employment) unless you appeal to “it would have been worse” argument, with the “water level constant” there will be nothing to propel the economy forward.

The point is that the QE strategy is a weak form of monetary stimulus – just enough to avoid deflation, which Bernanke has explicitly stated was his goal. It doesn´t provide a view of the “final destination” which is what will determine people´s decisions. That would be much better captured by the Fed stating a target level for nominal spending. Even previously die-hard “fiscal stimulus” adherents like DeLong have come around to that view expounded ad nauseum by Scott Sumner, David Beckworth, Nick Rowe, among a few others. Here´s DeLong in a recent post:

And central banks’ failure to regard their primary job to be the stabilization of nominal income – their failure not only to be good Keynesians, but even good monetarists – raises the question of whether central banking itself needs drastic reform. Back in 1825, the Bank of England’s Governor Cornelius Buller understood that when the private sector had a sudden panic-driven spike in demand for safe and liquid financial assets, it was the Bank’s responsibility to meet that demand and so keep bankruptcy and depression at bay. How can his successors know less than he did?

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