Should the Fed engage in insider trading? Maybe.
Earlier I argued for Lars Svensson’s definition of policy efficiency, equate the policy forecast and the policy target. (Bernanke sort of endorses Svensson’s idea here.) In other words, if your goal is 5% growth in nominal GDP, then increase the money supply until nominal growth is expected to be roughly 5%. But what if conventional monetary policy has run out of ammunition, if buying ever more zero yield T-bills has no effect?
Some are now advocating unconventional open market purchases, involving long term bonds, stocks, and Hamilton even suggested foreign bonds. If the policy of reflation succeeds then long term T-bond prices might fall, but stocks and foreign bonds might well appreciate in value. This is important because bank reserves have risen to more than 10 times their normal level, and it is widely expected that the Fed will have to sell some assets to rein in the monetary base once we escape from the “liquidity trap.”