The Fed has finally decided to swing for the fences with monetary policy. It announced yesterday that moving forward it will purchase another $700 billion of agency mortgage-backed securities, $100 billion of agency debt, and $300 billion of long-term Treasury securities. Add this move to the already $1 trillion-plus expansion of the Fed's balance sheet since the beginning of the crisis and the almost 0% federal funds rate and we have a Fed that is finally pulling out the big guns. This latest action, however, is the Fed's boldest move yet and sends a clear message that we have only begun to see what unleashed unconventional monetary policy looks like in practice. So much for the view spouted by many observers that monetary policy is all tapped out.
Like Tyler Cowen, I wish that such a bold policy move would have been done from the start instead of the piecemeal approach the Fed has tried to date. It would have reduced the need for a large fiscal policy stimulus. I also wished the Fed would have unleashed unconventional monetary policy in a more explicit manner by stating some target for nominal GDP growth or inflation (with the first of the two choices being my preferred option). Still, this change in policy is a huge improvement and should make a difference.
While the Fed's new policies do raise the possibility of inflationary problems down the road, let us not forget why this move is needed: (1) nominal spending is crashing in the United States and (2) only unconventional monetary policy has been shown to fix such problems. For those who are highly concerned about the inflationary implication of the Fed's expanding balance sheet I would refer you to Nick Rowe's thoughts on the matter.
Update: See The Economist's discussion of this policy move.
Like Tyler Cowen, I wish that such a bold policy move would have been done from the start instead of the piecemeal approach the Fed has tried to date. It would have reduced the need for a large fiscal policy stimulus. I also wished the Fed would have unleashed unconventional monetary policy in a more explicit manner by stating some target for nominal GDP growth or inflation (with the first of the two choices being my preferred option). Still, this change in policy is a huge improvement and should make a difference.
While the Fed's new policies do raise the possibility of inflationary problems down the road, let us not forget why this move is needed: (1) nominal spending is crashing in the United States and (2) only unconventional monetary policy has been shown to fix such problems. For those who are highly concerned about the inflationary implication of the Fed's expanding balance sheet I would refer you to Nick Rowe's thoughts on the matter.
Update: See The Economist's discussion of this policy move.
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