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.

I knew this would happen.  QE3 raised stock prices by about 2%. That’s not very much.  Even the roughly 5% rise that might be attributable to rumors of QE3 is not all that much.  The article incorrectly claims stocks have fallen since QE3.  I suppose that’s true if you start the clock from the day after QE3 was announced, but why would you do that?  Stocks are up 1% from the day before the announcement.  Standard finance theory suggests that the only response that matters is the movement of stocks in reaction to the announcement, perhaps including rumors of the announcement.

I can’t say I’m surprised the press looks at things backward.  It’s been obvious for quite some time that both the media and the economics profession reject the EMH.  There’s that fascination with the predictions of pundits.  The hero worship of those forecasters who have been successful, just as skilled roulette players are lauded in Vegas. “Pundit X saw the crisis coming way back in 2003!”  People are watching carefully to see how stocks move over time, in the belief that it will reveal some sort of hidden message about the effectiveness of QE3

It’s the world we live in.  But the truth is there there’s nothing to see here folks, just move right along.  The QE3 did a little bit of good, but not enough to spur a rapid recovery.  If you want more (and I do) then we need to press for NGDPLT.

PS.  I missed the debate (I miss all debates) but Obama dropped 10.3% over at Intrade (or 7.6 percentage points.)  How is that even possible?  Intrade odds are not like poll numbers–they are more like a random walk.  Losing 10.3% in one debate?  Was he really that bad?  (Lucky for Obama that he went in with a big lead.)



38 Responses to “How’s QE3 doing so far? Wrong question!”

  1. Gravatar of Morgan Warstler Morgan Warstler
    3. October 2012 at 20:07

    Book dedication to me! Closer that ever! Gotta love definitive bets about the nature of Hegemony VS. Monetary theory.

    Cause if you all just live and work in the A Power’s world, that’s the RATIONAL EXPECTATION.

    We shall see.

    Note: I alone, I ALONE, said it is the debates. If I shoot the moon, I’m going to be very hard to live with.

  2. Gravatar of Saturos Saturos
    3. October 2012 at 22:47

    According to Democracy in America at the Economist Romney absolutely pwned Obama. I’ll watch the video this evening, then I’ll tell you why.

  3. Gravatar of Saturos Saturos
    4. October 2012 at 00:27

    I have a dream … that one day, when the president says “we went through the worst financial crisis since the Great Depression. Millions of jobs were lost.” the implicit inference will be recognized as false (due to the falsehood of the implicit implicative premise).

  4. Gravatar of Saturos Saturos
    4. October 2012 at 00:28

    OK, still haven’t seen the whole debate, but if this sample is representative then I can understand why Obama got thrashed:

  5. Gravatar of Benjamin Cole Benjamin Cole
    4. October 2012 at 01:26

    I am worried that QE 3 “won’t work,” but that because it is not large enough, nor coupled with action on IOR, nor coupled with NGDP targeting.

    Then, people will say, “See? QE does not work.”

    A little like sending a new type of cavalry into the field, where they are terribly overmatched, and then announcing that light quick cavalries are stupid. I don’t know why I resorted to a military analogy.

  6. Gravatar of Morgan Warstler Morgan Warstler
    4. October 2012 at 01:31

    Benji, I said the same thing, because this is NOT NGDPLT. This is not a LT.

    And it is about the LT, it is about knowing that rates can GO UP, and believing that part, that the Fed can and will force the govt. to turn debt over and suddenly have taxes just paying interest.

    NGDPLT cannot be an argument that allows: let’s borrow more since rates are so low.

  7. Gravatar of Jim Crow Jim Crow
    4. October 2012 at 01:53

    I thought the debate was pretty mind numbing. Romney certainly ran the table from a pure psychological/expectations/theatrical viewpoint. But substance-wise (and I know 99% of people don’t care about substance) they both were equally terrible. “I won’t borrow from China!!” Oy. I say a prayer to Friedman’s ghost that he doesn’t believe the nonsense he spouts. As far as QE3 is concerned, I’m just curious to see how much of an improvement, if any, we get in the relevant economic numbers since that data comes out after the fact.

  8. Gravatar of Saturos Saturos
    4. October 2012 at 01:56

    Ben, yes it isn’t going to do much, as the goal is vague, and the inflation ceiling hasn’t been clearly removed. The point of specifying an explicit target is to give a clear algorithm to traders for what and when to buy and sell. And worst of all promising that rates will be low in 2015 is promising to fail or hyperinflate, despite what Bernanke thinks. To see why, suppose the price level had adjusted by 2015 (unlikely). Now Bernanke is promising to be irresponsible. He is trying topromise to boost spending once the ZLB is over, thus boosting spending today (but talking about rates instead of the base, pace Woodford). But as I explained to Clive Crook, if spending is successfully boosted today, then the threat to “overstimulate” in 2015 won’t actually have to be carried out, as nominal spending will remain on track without further monetary expansion, because further inflation won’t be required, because AS won’t have shifted. But if the instrumental promise is unconditional, then that is a promise to be irresponsible. But Bernanke has guaranteed price stability. Therefore the promise is not credible in the full level-targeting sense; it’s merely a signal that Bernanke “means well”, perhaps slightly more well than before.

    The only way to gain full credibility is to fully specify the goal target without saying anything about the instruments.

    The big advance from QE3 is that, as Evan Soltas pointed out, the Fed has done an intellectual U-turn, setting itself on a path that it can choose to advance down innocuously toward better monetary policy.

    But Michael Woodford, and all the other “people” are right: “QE” doesn’t work. Monetary expansion under NGDPLT wouldn’t be called QE, it would be called monetary expansion. “QE” proper (as opposed to the “qualitative easing that we’ve actually been doing”) doesn’t involve doing anything different to what the Fed normally does. The difference is how it’s communicated: the Fed starts pointing at the size of its liabilities (or assets, with qualitative easing) instead of the short-term interest rate. Or it can talk about future short-term rates, which it calls “forward guidance”. So “QE” is just a way of framing policy, of targeting the base. But NGDPLT is all the target and framing we need. Whereas QE is inherently focussed on the wrong thing, communicated the wrong way, and hence ineffective. It is closed ended expansion instead of open-ended expansion, where you no longer point at the instrument, since its specific setting is an endogenous variable, so there is nothing to be pointed at. (Actually this kinds fits in with Scott’s “Zen” depiction of monetary policy: “First tell me where you want to go”.)

  9. Gravatar of Saturos Saturos
    4. October 2012 at 01:57

    Jim Crow, politics isn’t about policy.

  10. Gravatar of Jim Crow Jim Crow
    4. October 2012 at 02:15

    Saturos, you won’t get any argument from me but, good grief, it just seems to get worse every cycle. Hard to believe I actually miss the good old days when V-chips and Parental Advisory labels were the center of the political universe.

  11. Gravatar of Morgan Warstler Morgan Warstler
    4. October 2012 at 02:45


    Scott has bet his cred on Policy > Politics.

    We shall see.

  12. Gravatar of Saturos Saturos
    4. October 2012 at 03:13

    Whoops, meant to repost the link to my comment on Clive Crook’s article:

  13. Gravatar of Ritwik Ritwik
    4. October 2012 at 03:17

    So, what you mean by ‘the Fed controls the nominal economy’ is that it affects stock prices for a few hours?

  14. Gravatar of Saturos Saturos
    4. October 2012 at 03:55

    Here’s some explanation of why Romney won:

    Evan Soltas says:
    but also says:

  15. Gravatar of Major_Freedom Major_Freedom
    4. October 2012 at 04:48


    I knew this would happen. QE3 raised stock prices by about 2%. That’s not very much. Even the roughly 5% rise that might be attributable to rumors of QE3 is not all that much. The article incorrectly claims stocks have fallen since QE3. I suppose that’s true if you start the clock from the day after QE3 was announced, but why would you do that? Stocks are up 1% from the day before the announcement. Standard finance theory suggests that the only response that matters is the movement of stocks in reaction to the announcement, perhaps including rumors of the announcement.

    If stock prices were up 5% or 10% we’d be hearing about how market monetarism predicted this would happen, on the basis that it proves the economy is demand deficient and investors want more QE.

  16. Gravatar of DanC DanC
    4. October 2012 at 05:05

    In anticipation of QE1 and 2 I bet on the stock market. In anticipation of QE3 I just made a few moves to hedge against inflation. Simply, I don’t expect any real growth from QE3.

    A change in political climate, a move toward structural changes in the economy, will have more impact then inflation making wages less sticky or creating the illusion of wealth creation through housing.

    Will employers increase production or will they simply raise prices? Have we done anything to increase potential GNP with QE3? Are sticky wages the biggest problem or have bad policies lowered potential GNP?

  17. Gravatar of dtoh dtoh
    4. October 2012 at 06:24

    You don’t fully understand how this works.

    At a given point in time, at any specific price of financial assets, people are willing to hold a certain amount of financial assets versus exchanging them for real goods and services. QE (or OMP more generally) works in two ways first it pushes up financial asset prices making people more willing to exchange financial assets for real goods and services. This bit you can judge just by looking at the price of financial assets (and not just the stock market BTW).

    The other way OMP works is by changing expectations, at a given price, people are more willing to exchange financial assets for real goods services because of these changed expectations.

    So in effect OMP, moves you along the curve but it also shifts the curve. Stock prices will tell you something about how far along the curve you have moved, but they won’t tell you how much the curve has shifted.

    This seems obvious to me. Am I missing something.

  18. Gravatar of Saturos Saturos
    4. October 2012 at 06:39

    Scott, have you seen this paper before?

    Miles Kimball – The Quantitative Analytics of the Basic Neomonetarist Model

    Abstract: This paper constructs a dynamic macroeconomic model with less- than-perfect price flexibility which has a real side consistent with Real Business Cycle Theory, augmented by investment adjustment costs, increasing returns to scale, and a new, flexible formalization of imperfect competition. A new mode of approximation is developedþuseful for any model in which one state variable adjusts quickly, while another state variable adjusts slowly. Even with investment adjustment costs, monetary expansions are found to raise the real interest rate. The determinants of real rigidity and the macroeconomic rate of price adjustment are investigated.

  19. Gravatar of Saturos Saturos
    4. October 2012 at 06:42

    dtoh: “Scott, You don’t fully understand how this works.”

    That seems pretty bold. I guess your superior understanding of monetary transmission mechanisms led you to cry foul in 2008, when asset prices all signaled that money was tight not easy?

  20. Gravatar of Max Max
    4. October 2012 at 06:56

    dtoh, it’s not clear to me that QE should be able to affect asset prices. Maybe this intuition comes from the fact that the buyer has to offer a higher price in order to acquire the assets. But after the purchase is complete, why shouldn’t the price return to its original level?

  21. Gravatar of dtoh dtoh
    4. October 2012 at 06:58

    Can’t remember what I was doing in 2008, but I’m pretty sure I was not thinking about monetary policy.

    I actually believes Scott understands this at some level. In the past he has said that a way to judge monetary policy is some juxtaposition of real expected rates versus expected NGDP.

    I think the problem is that he hasn’t fully internalized his understanding of this because he hasn’t yet developed a coherent framework for how the transmission mechanism works.

    I might also add that for the purposes of measuring asset prices, you need to look at expected real risk adjusted annualized returns. Scott’s post just talks about nominal asset prices, which is really surprising since he clearly knows better. (Could be he is assuming that Fed actions and pronouncements have no impact on inflation expectations…. but I doubt it).

  22. Gravatar of dtoh dtoh
    4. October 2012 at 07:06

    I think that is why LT is important, you have to keep buying…or stop buying… or start selling when you hit or exceed the target.

    An easy way to think of this is as if the only financial asset was straight debt and as if there is only a single provider of credit. If the lender provides more credit, AD will go up.

  23. Gravatar of Gabe Gabe
    4. October 2012 at 07:18

    We need 100 billion a month of purchases in MBS from Goldman Sachs and JP Morgan. The only reason we can’t get this done is because of the free-market idealogue Austrian economists that have an iron grip on Federal Reserve policy.

  24. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    4. October 2012 at 07:42

    ‘Was he really that bad?’

    It was a case of ‘Let Obama be Obama.’ He was, and it showcased what a dilettante he is. I guess sparring with David Letterman isn’t good prep for a heavyweight fight.

    Obama doubled down on his ‘profits eat up overhead’ idea, at one point. He seems to think that profits are added to costs, rather than being the result of efficiently managing costs.

    It could have been even worse, but Romney passed on several chances to land haymakers on the Prez’s jutting chin. Probably a calculation that the audience could only absorb so much punishment at one sitting (besides he could come across as mean).

  25. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    4. October 2012 at 07:51

    When you’ve lost Chris Matthews and gang;

    you’ve lost, big time.

  26. Gravatar of Mark_H Mark_H
    4. October 2012 at 08:13

    Also, the chance that QE3 would happen was almost certainly already priced into stocks, which would make the market reaction to QE3 look smaller than it is.

    I know that this point has been made here before, but in this context it makes the media analysis seem even more sloppy.

  27. Gravatar of Saturos Saturos
    5. October 2012 at 06:18

    Patrick, I think Romney has Obama beat on the chin-jutting.

  28. Gravatar of 123 123
    5. October 2012 at 07:46

    Scott, it is you vs. Lars, who said markets will do well until the economy will reach thte Evans point.

  29. Gravatar of ssumner ssumner
    5. October 2012 at 07:47

    dtoh, I understand that real asset prices are part of the transmission mechanism, and have said so. But the “real” that matters is asset prices divided by nominal wages, not nominal prices.

  30. Gravatar of ssumner ssumner
    5. October 2012 at 07:47

    123, Not me.

  31. Gravatar of 123 123
    5. October 2012 at 08:55

    Scott, you are criticizing market timing. Lars is recommending market timing:$file/CrossAssetStrategy_140912.pdf

  32. Gravatar of dtoh dtoh
    5. October 2012 at 11:54

    It depends on who the economic player is. If it is an individual with savings who is increasing consumption because financial asset prices have risen, nominal wages have nothing to do with the change in behavior. Same for businesses buying real assets or home buyers. If you want to understand the aggregate effect you need to look at some aggregate price index… maybe you weight nominal wages more heavily, but even that is not clear to me.

    Also, asset prices (real or nominal) are IMO less important than expectations of return. So even if there is no change in financial asset prices, the expectation of higher NGDP will cause economic players to exchange an increase quantity of financial assets for real goods and services (and I include in “exchange” new equity issuance and borrowing). Shifting the curve I think plays a bigger role than moving up and down the curve.

    You should stick to your mantra “Judge monetary policy by NGDP growth….not nominal interest rates [i.e. financial asset prices].

  33. Gravatar of Scott Sumner Scott Sumner
    5. October 2012 at 17:50

    123, Isn’t that his job?

    dtoh, Unlike you I don’t think “increasing consumption” causes economic growth, I think it’s an effect of economic growth. I’m not a Keynesian. Indeed when growth speeds up the share of income saved tends to RISE.

  34. Gravatar of dtoh dtoh
    5. October 2012 at 19:30

    I didn’t say anything about consumption. I’ve been exceptionally clear and careful in all my comments to always say increased spending on goods and services (both consumption and investment).

    I agree. When growth speeds up, financial asset prices (remember to think about prices not in nominal terms but in terms of real expected annualized returns) drop which results in economic players being less willing to exchange financial assets for goods and services. Thus the increase in the share of income which is saved.

  35. Gravatar of 123 123
    5. October 2012 at 20:55

    Scott, he would still hold this opinion even if it would not be his job.

  36. Gravatar of ssumner ssumner
    6. October 2012 at 05:54

    dtoh, You talked about wages having nothing to do with consumption in your second sentence. That’s what I disagree with. When consumer prices rise and wages are sticky then firms have more incentive to produce consumer goods.

    On the other hand if you are talking about velocity, then what matters is the nominal return on alternative assets, as cash earns a zero nominal reeturn.

    123, Maybe so. But those investment opinions have nothing to do with “market” monetarism.

  37. Gravatar of dtoh dtoh
    6. October 2012 at 18:18

    1. I agree wages impact consumption, but I’m talking about the transmission mechanism by which QE3 (and OMO in general) impact AD. I don’t think OMO impact wages except indirectly through increased AD.

    With a financial asset price model, you can ignore velocity. You just need to recognize that at the ZLB, money becomes dual purpose. It ceases to be just a medium of exchange and also becomes a store of value (i.e. a financial asset). And like any other financial asset the correct way to look at price (for the purposes of understanding monetary policy) is risk adjusted expected real return (i.e. 0 minus the expected inflation rate).

  38. Gravatar of Federico S Federico S
    9. October 2012 at 12:50

    (You’ll probably miss this but anyways) — Why do you think the only effect that matters is the immediate effect? The stock market can change its view on the effects of QE3 over time. This isn’t to say that markets aren’t efficient — all I’m claiming is that the the S&P can react in a different way to QE3 over time as it digests the available information (even if no new information is available). I am assuming that information isn’t immediately incorporated into asset prices, which to me seems like a fine assumption to make. Is this what you’re disagreeing with?

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