Six months ago I ended a post writing:
Mysteriously, while the “solution” has been staring in everybody´s face, few have taken the step to propose it. Bear with me. If all the nasty things that are evident – the high unemployment rate, the low employment-population ratio, the low labor force participation, among several activity LEVEL indicators – can be traced to the “unusual” drop in nominal spending (NGDP) that occurred after mid-2008, why not set a nominal spending level target?
After all, that´s surely under the control of the Fed. But no, the Fed keeps indicating that things will remain “awful” for an extended period of time, and that´s why rates will be kept low going into 2014 or even 2015!
And if “awful” is what you are content with, “awful” will turn into a permanent feature of the US economy. In other words, “jobs, farewell”!
Today two posts attracted my attention. One from Scott Sumner titled: How’s QE3 doing so far? Wrong question!
The question is; “how did it do?” Past tense. Here’s CNBC:
The Federal Reserve’s latest easing program may be nicknamed “QE Infinity” on Wall Street, but it’s having a very limited effect on the markets and economy so far.
Stocks have been flat to slightly lower since the central bank announced the third round of its quantitative easing program — QE3 — while economists remain pessimistic that it will achieve its stated goal of bringing down the unemployment rate.
That´s the pessimistic one. From Ryan Avent at Free Exchange, writing after the release of the minutes from the FOMC´s September 13 meeting, things look a bit brighter:
Now consider the September language (RA´s bolds):
To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens. In particular, the Committee also decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015.
Gone is the explanation that weak resource utilisation and low inflation will necessitate low rates. Instead, we learn quite clearly that rates will remain low even after good times have returned. That seems like a very important shift.
But perhaps this is reading too much into the Fed’s spare language. Minutes from the last meeting, released today, suggest otherwise:
With regard to the forward guidance, the Committee agreed on an extension through mid-2015, in conjunction with language in the statement indicating that it expects that a highly accommodative stance of policy will remain appropriate for a considerable time after the economic recovery strengthens. That new language was meant to clarify that the maintenance of a very low federal funds rate over that period did not reflect an expectation that the economy would remain weak, but rather reflected the Committee’s intention to support a stronger economic recovery.
There you have it. The Fed is clearly explaining that rates will remain low even after economic conditions would justify an increase. That implies that future inflation will be above the Fed’s target, and inflation expectations are responding. Mr Bernanke’s name probably won’t make the evening news tonight. Yet the Fed effectively loosened monetary policy today, in a manner that should raise the return, in growth and hiring, of its ongoing asset-purchase plans.
The only difference between the post-meeting statement and the minutes is the explanation for the meaning of the new language.
They certainly took a long time figuring out what I, who am not a central banker, figured out the first time they said it. Maybe it´s “too late and too little” and who´s going to believe that Bernanke, the quintessential inflation targeter who implied that guys like Krugman and Blanchard who 3 years ago suggested a temporarily higher inflation target were “out of their minds”, is going to allow that to happen. An indication is given by Kocherlakota´s “recent conversion” to “dove land” saying that inflation would be allowed to reach 2.25%!
Ryan said the “Fed effectively loosened monetary policy today…”. I think Scott´s “pessimism” is more apt. Here are the markets reactions for the past month. Today´s gains ‘don´t set a standard’.