There’s enough news here for a month’s worth of posts. Matt Yglesias has my general take on things, although my hunch is that we are a bit too little and too late to significantly affect this business cycle. However this is really good news for monetary policy going forward, especially for the next recession. It’s baby steps toward level targeting.
Now for the title of this post. Here’s what the Fed says it’s trying to do:
These actions, which together will increase the Committee’s holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.
Nope. Long term yields increased on the news, just as market monetarist’s would have expected. And thank God they did! The higher yields are an indication that markets have (slightly) raised their NGDP forecasts going forward. The jump in equity markets suggests that RGDP growth will also rise (albeit modestly.) The bad news is that 100 points on the Dow is indicative of a really small change in the RGDP growth rate, basically within the margin or error. So we’ll never know any more than we know right now about whether the policy will “work.” Of course that won’t prevent hundreds of economists from making silly pronouncements a few months from now, based on actual changes in RGDP. I beg you to ignore them all.
One other thing. The rise is interest rates undercuts the Keynesian model (although I suppose the sophisticated version merely predicts that long rates would fall relative to the (rising) Walrasian equilibrium value.) But the markets are even more strongly rebuking John Cochrane’s claim that Bernanke’s promises would not be credible. Even a very vague and inadequate promise from the Fed was enough to boost markets significantly.
PS. I kind of regret the sarcastic tone of the title of this post. Bernanke deserves a lot of credit for what the Fed did today. It’s not as much as I’d like, but he’s way out in front of the median economist. It could be much worse.
Update: The one percent jump in stocks obviously just reflects the unexpected part of the announcement. Most observers expected the Fed to do something, and it seems likely that the rally over the last few weeks reflects (in part) hints from Bernanke that more would be done. So maybe it’s a 2%, 3%, or 4% jump. That’s not game-changing, but it’s also not chopped liver. (I see commenter O. nate beat me to it.)
Update#2: The jump in long term rates strongly supports David Beckworth’s argument in this excellent post.