One down, two to go

In June I proposed a “pragmatic” plan for the Fed.  It wasn’t my first choice, far from it.  But it was something that I thought was politicallly feasible, and also something that could help quite a bit.  Today the Fed adopted one of those three recommendations; open ended QE.  At least that’s how I interpret the following:

To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee agreed today to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month.

Note that there is no indication of the total amount to be purchased.  In addition, they did move closer to level targeting, something I didn’t think was politically possible:

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.

What’s changed since June?  That’s pretty easy to answer; Woodford’s paper was obviously very influential, and that changed the politics on level targeting.  So Woodford also deserves a lot of credit.  It’s not as specific as Woodford or I would like, but it’s something.  More specifically it’s a dog whistle that Bernanke hopes the markets will hear, but which he also hopes will be missed by the Tea Party.

Lars Christensen has some astute comments.



52 Responses to “One down, two to go”

  1. Gravatar of Brito Brito
    13. September 2012 at 10:06

    Just noticed you’re not cited in the Woodford paper that advocates NGDP level target, that’s a bit rude.

  2. Gravatar of Saturos Saturos
    13. September 2012 at 10:13

    Here’s the link to Bernanke’s conference:

  3. Gravatar of Saturos Saturos
    13. September 2012 at 10:14

    Repost – The Fed’s New Projections:

  4. Gravatar of Cameron Cameron
    13. September 2012 at 10:20

    Finally the Fed sets projections to what they want them to be! (okay, recovery is a little further in the future than it should be, but nonetheless, good news)

    2 year breakeven rate up 14 basis points, 5 year up 11 basis points.

  5. Gravatar of Saturos Saturos
    13. September 2012 at 10:21

    Bernanke speaks:

    Unprecedented Accomodation.
    Dealt with ZLB:
    Forward Guidance Balance Sheet Policy
    Carefully Weghing benefits and costs
    Monetary policy cannot cure all ills
    Operation Twist used.
    Incoming data confirm growth inadequate to reduce unemployment
    Inflation at or below 2%
    Further accomodation warranted
    Expand purchases, extend forward guidance
    40bn per month
    85bn longer securities held each month until end of year
    Will lower rates, help housing.
    Comittee will monitor incoming information
    If we do not see improvement will continue until we do
    Look for broad based growth
    Will take inflation outlook into account
    Highly accomodative policy approproiate even as economy picks up
    FF near zero till mid-2015

  6. Gravatar of TallDave TallDave
    13. September 2012 at 10:24

    The Tea Party tends to be very wary of anything that looks like money-printing (large deficits, loose money). Unfortunately Bernanke has no control over fiscal spending; ideally we would cut gov’t spending while loosening monetary policy and quickly get back to something like best-case GDP growth and employment.

    Unfortunately for the relationship between the Tea Party and Bernanke, his choices are between doing something that looks like moneyprinting or doing nothing (worse). I do wish Bernanke would disavow the Krugman/DeLong pseudo-Keynesian notion of throwing government money at the economy, because that’s where the Tea Party’s animus is more correctly aimed, and it would buy him a lot of cover.

    Sadly I’ve yet to see much sign Romney/Ryan are able to move beyond the concept of “sound money” or understand that low interest rates aren’t the same as loose money. OTOH, they don’t really have to, as long as they take care of fiscal policy where they would actually have some say, and not incidentally are infinitely better than Democrats.

  7. Gravatar of Saturos Saturos
    13. September 2012 at 10:24

    3 concerns
    QE akin to spending
    Hurts savers?
    Risks inflation?

    Purchases not like spending, buys financial assets not goods and services, all assets ultimately sold, earnings remitted to treasury, actions reduce not increase deficit and debt.
    Holders of assets receiving lower returns, but low rates help support values of other assets. Healthy economy promoted by lower interest rates
    Inflation varies has swung recently, but has averaged very close to 2% over last few year, longer term expectation stable.
    Fully commited to both sides of mandate, has tools and will to react to any threat.

  8. Gravatar of Lars Christensen Lars Christensen
    13. September 2012 at 10:27

    Scott, I think this is quite a victory for our team. It is certainly not perfect, but this is as you note better than we could have expected – much better.

    Here is my take on it:

  9. Gravatar of I think Ben just did it… « The Market Monetarist I think Ben just did it… « The Market Monetarist
    13. September 2012 at 10:28

    […] Sumner has two comments (here and here) on the FOMC decision. Share this:Email Pin ItLike this:LikeBe the first to like this. Leave a […]

  10. Gravatar of Saturos Saturos
    13. September 2012 at 10:38

    Q&A responses

    We’ll be looking for signs of sustained improvement, but
    obviously cannot sustain until all excess unemployment is gone

    We’ve been thinking about what our reaction function is, don’t know exact numbers.

    Not going to be premature, even after economy recovers, not going to rush to tighten, even as employment starts recovering.

    Stock price and gold up, why not part of reaction function?

    Not trying to intentionally raise inflation.

    Think economy will be recovering by mid 2015, but don’t think this will entail

    We take a balanced approach, bring inf, back to target over time, but take into account deviation of both goals from targets

    Why should people believe?

    0.4 reduction in unemployment the limit?

    Cites on speech and research at Jackson Hole

    Policy not panacea. Looking for other policymakers to do thier part. Can’t solve problem by self.

    0.4 reduction (change in forecast) depends on “where economy goes” (Little bit understatement). Meaningful and significant contribution. “We don’t have tools that are strong enough to solve the unemployment problem”.

    Transmission mechanism?

    Why rate down changes demand?

    A conditional program, accomodation according to how economy evolves. This is strength of program.

    Affects interest rates, but also stock prices, home prices, all different channels impact on economy, labor market, meaningful impact, not panacea, make sure don’t stagnate, make progress.

    Robin Harding: Is this the limit?

    Balance sheet actions, restructure

    Communications tools. Assure public Fed will remain accomodative for long enough.
    clarify response to economic condition

    Pedro da Costa: Transmission mechanism? Skepticism at Jackson Hole. Wall Street v. Main Street.

    Bernanke: Is Main Street policy, trying to meet maximum
    Tools of monetary policy are ipso facto to affect asset prices.

    Consumers feel wealthier,more likely to buy houses if prices rise.

    One of concern is demand, – more willing to spend, going to provide demand.

    Jon Hilsenrath: Define: Improve Substantially. What are additional purchases possible

    Ongoing sustained improvement. No specific number, but
    unemployment coming down sustained but maybe not rapid (dont know if tools strong enough for that)
    Tools: MBS purchase, Treasuries, other assets. Better explain communicate rate policies, more accomodative financial conditions

    Binyamin Appelbaum: Why not specific target?

    Looking for “general improvement”. But not only indicator. Participation fell so unemployment not best indicator. Looking for broad improvement, “little wiggles” wont radically shift policy.
    Economy quickening. No single number that captures that.

  11. Gravatar of Saturos Saturos
    13. September 2012 at 10:42

    More people have access to mortgage credit, part of how policy works

    Greg Ip: How does openendedness help? Explain conditionality’s benefits.
    Operation Twist?

    Our policies always conditional, always review asset purchases to see if still necessary.
    Make that more explicit and transparent to public, make ovious Fed will do what’s needed
    We’re not promising a cure to all ills, but can promise support, will take action if economy falters.

    Scott, what would you ask? NGDP?

  12. Gravatar of Saturos Saturos
    13. September 2012 at 10:43

    Dude asking about his plans for future. Political, are you helping Obama?

    I think we’ve been successful at being apolitical, try very hard. Don’t take anything into account other than state of economy.

  13. Gravatar of Saturos Saturos
    13. September 2012 at 10:44

    Now Basel 3 and community banks. Grilling over?

  14. Gravatar of sean sean
    13. September 2012 at 10:46

    He Upgraded the forecast too for higher growth and higher inflation. Very much in woodford framework.

    Also it means they are now saying what they want growth to be and setting policy for the target.

  15. Gravatar of Saturos Saturos
    13. September 2012 at 10:52

    Divided Fed? Don’t you wish skeptics would shut up?

    Complex times, complex situation. Range of views. Good to hear diff points of view. Collaborative and collegial. 11 to 1 vote, pretty good sign consensus, broad center of committee supports consensus continue to support.

    But doesn’t negative commentary hurt effectiveness?

    There’s going to be negative commentary, some people belive more than others, virtually all agree from my research that it has impact. Don’t think its panacea, do think it’s going to nudge in right direction.

    What other policy actions would you like to see outside Fed. How can you deal with fiscal cliff.

    Range of areas, can’t prescribe. But 1 basic thing that could be done is address fiscal cliff and fiscal sustainability simultanaeously.

    “I don’t think our tools are strong enough to offset major fiscal shock”

    So important that policymakers get together.

    Now creepy german guy asks about projections. How long can we have strong growth with no inflation. Lot of economists see no effect, aren’t you worried about giving carte blanche to Congress>

  16. Gravatar of Saturos Saturos
    13. September 2012 at 10:54

    Given that there is slack, normal that economy should grow above trend, don’t anticipate overheating, so long as pay attention to expectations, think inflation will be close to 2% target.

    Bottom line for research: tools not powerful enough to solve problem, but can provide meaningful support

    [Bernanke is just walking away from “Self-induced Paralysis” views.]

  17. Gravatar of Arthur Arthur
    13. September 2012 at 10:56

    Brazil seems to be the biggest winner today. São Paulo’s Ibovespa index rose 3,4%.

  18. Gravatar of Saturos Saturos
    13. September 2012 at 10:58

    Guy asks: Concerns from Woodford about credibility of forward guidance. (Seems to be confused, thinks conditionality is bad)
    Whether you will keep rates low, whether youll pull back as always.

    Woodford my colleague, coauthor, friend
    Forward guidance our most powerful tool.
    SAid NOMINAL GDP TARGETING in conf!!!. Credibility for many years, “even if inflation rose”. Whether we have credibility is empirical question. Markets responded to our announcements, private forecasts change.
    So evidence in favor. And good reason for that: we’ve explained rationale. Consensus that as personnel change; this is appropriate approach. Reserve of credibility to use in subsequent episodes.

  19. Gravatar of marcus nunes marcus nunes
    13. September 2012 at 10:58

    If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability.

    Since everyone knows that to Bernanke ‘price stability’ means 2% inflation, as soon that he feels that threshold is threatened, everyone will expect the program will stop.

  20. Gravatar of ChargerCarl ChargerCarl
    13. September 2012 at 10:59

    Perhaps this will inspire the ECB and BOJ to loosen policy?

  21. Gravatar of Saturos Saturos
    13. September 2012 at 11:00

    Mortgage rates at historical lows, how much lower can go?

    What we’ll do a function of how economy evolves.
    Hard to give exact estimate. I think markets are looking a little better, house prices continue to rise, hopeful that continues to improve. “This is one of the missing pistons in the engine”. House price recovery associated with economy recovery.

    Limited refinancing, how much can prices rise?

    Purchases of new homes what helps economy grow.

  22. Gravatar of Saturos Saturos
    13. September 2012 at 11:07

    How much of fiscal cliff is lack of adequate growth?

    Hard to give number.

    [I think today’s Bernanke genuinely believes that even full tilt policy (NGDPLT) could not cure unemployment, except maybe thru hyperinflation.]

    How much did fiscal cliff affect decision?

    We take economy as we find it, headwind. Europe, credit markets still impaired.

    Trying to take steps to assure stronger growth. Fiscal cliff one headwind, but many others. We’d like to see economy gather momentum, better placed to deal with shocks.

    AP: Shrinking labor force? How concerned?

    Last unemployment decline more than accounted for by participation decline. Femal participation flat, fewer college students part time.

    Part anticipated, but part cyclical. Reflects fact that people discouraged. Reentry might even temporarily raise unemployment rate. So we do want to look at range of indicator, not just Urate and payrolls, but also participation, hours.

    Thank you very much. This event has now ended.

  23. Gravatar of Saturos Saturos
    13. September 2012 at 11:11

    My comments:

    Isn’t there clear contradiction with saying:

    Slack, inflation not expected as economy grows into our projections till 2015


    Not panacea, can’t cure unemployment, research shows modest effects.

    I.e. denies being able to set policy until excess unemployment is eliminated, doesn’t want to accept higher inflation points (thinks unnecesary) for every point of unemployment unable to eliminate? (Further from Evans rule).

    So actually quite qualified, though still massive break from past.

    We need to get him to focus on goal targets for the variable he really controls, total volume of spending, NGDP. Put that on the level consistent with a sticky trendline.

  24. Gravatar of Bill Ellis Bill Ellis
    13. September 2012 at 11:14

    Sadly…The Tea Party is not missing the signals…

    Congressman Scott Garrett, who chairs the House Subcommittee on Capital Markets and Government-Sponsored Enterprises…

    Called the Fed’s actions… “radical and unprecedented”

    “…said the central bank was deep into “fiscal-type” waters and that future Fed chiefs should be limited to a single term in office.”

    said…”The Fed is taking such extreme steps that Congress and the American people are saying please stop! There are huge potential risks that are being created by these actions,”

    And he said….”The Fed and their defenders claim that their independence is being eroded by others’ actions, but I claim the exact opposite. I believe the Fed’s own actions are eroding its independence,”–business.html

    The Fed has lit the Teapublican’s hair on fire.

    But the Fed have left themselves an escape hatch if they can’t take the heat…They did not give the markets a hard target, but instead only set a vague goal.

    They will keep buying…”If the outlook for the labor market does not improve substantially.” What does that mean ? Unemployment should improve somewhat with out any Fed action.

    The effectiveness of this action may depend on how the markets gauge how much pressure the Teapublicans can bring to bear, and how long the Fed can stand up to it. That leaves the markets with out a very clear signal.

    It would be awesome if there was a political counter weight to the Tepublicans. Obama coming out in favor of this would do it, but that is unlikely to happen at least until after the election (That would not be too late ).
    Romney will add weight to the Tepublican side of the scale…and even after the election, if he wins, he is not about to waste his political capital on a battle with the hard money elements in his own party that control congress.

  25. Gravatar of Saturos Saturos
    13. September 2012 at 11:24

    Binyamin Appelbaum was tweeting too:

    Bernanke reminds us that Fed projections are worthless, because *everyone* uses different baselines.
    Bernanke: We’re not trying to increase inflation, but we might act more slowly to reduce inflation if it should happen to happen.

  26. Gravatar of ssumner ssumner
    13. September 2012 at 11:37

    Saturos, I saw much of the conference, and thought Bernanke handled himself better than usual. One had the sense that he actually believed much of what he was saying. Some things that stood out:

    1. Fed stimulus reduces the national debt. Where have we heard that?

    2. A very interesting and unprompted discussion of NGDP level targeting, One had the feeling that if he were out of the Fed right now he’d be very comfortable with Woodford’s level targeting of NGDP idea. Where’d Woodford get that idea?

    3. He talked jobs, jobs, jobs. No fixed amount of stimulus, but enough to get the job done on jobs. That’s obviously not the ideal way of doing it, but since they are also still targeting inflation, it’s actually not that far from NGDP targeting (albeit not exactly level targeting.)

  27. Gravatar of ssumner ssumner
    13. September 2012 at 11:40

    Everyone, I have to teach today, so am short of time–but excellent comments.

  28. Gravatar of Saturos Saturos
    13. September 2012 at 11:44

    Business Insider has a summary:

  29. Gravatar of Saturos Saturos
    13. September 2012 at 11:45

    Goldman Sachs’ note from last night (can’t believe you missed this Scott):

  30. Gravatar of Bill Ellis Bill Ellis
    13. September 2012 at 11:46

    Scott …You teach everyday. Thanks.

  31. Gravatar of Saturos Saturos
    13. September 2012 at 11:46

    Oh, and Woodford just reacted to the news:

    The FOMC’s statement marks a step beyond recent approaches to providing policy stimulus, in two important respects.
    First, the Committee more clearly links the duration of its accommodative policies — both continued lower overnight interest rates, and continuing asset purchases — to the degree of improvement in the economy, and not just to a calendar date. They are still not as explicit about the conditions that will justify policy normalization as I would have recommended, but this is nonetheless an important and useful step, which should be more effective in increasing confidence that the economy will recover.
    Second, the additional asset purchases announced today consist entirely of agency MBS purchases, rather than long-term Treasury securities as under the Fed’s last two programs. This type of purchases is more likely to be controversial on political grounds, but is also more likely to influence the costs of private borrowing, and so likely to have a more direct effect on the economy.

  32. Gravatar of Saturos Saturos
    13. September 2012 at 11:48

    “A very interesting and unprompted discussion of NGDP level targeting”

    Well if I recall he didn’t say “level” targeting. One interpretation is that the reason he won’t do it is he doesn’t like its tolerance of well-above 2% inflation. Notice how he dodged people who tried to pin him down on whether the inflation ceiling had shifted.

  33. Gravatar of Philo Philo
    13. September 2012 at 12:12

    The Fed’s own prediction, as of today, is that even in 2015 unemployment will still be above their target, while inflation will remain below 2%. Why didn’t a questioner ask: Given the Fed’s own projection that what they are doing is not enough to get where they want to go, *why aren’t you doing more*?

  34. Gravatar of Matt Waters Matt Waters
    13. September 2012 at 12:14

    The greatest tragedy is that, even now, inflation fears seem so everpresent in the minds of FOMC meembers. I just don’t get, especially when price levels show that we could have 3% inflation for years before we go above a 2% inflation trend.

    This is all far better than, say, the Fed in 1937 saying that they shouldn’t have increased reserve levels but they didn’t want to admit they were wrong. But the contrast between glacial change in attitudes of the Fed and continued suffering due to unemployment is still astounding.

  35. Gravatar of Cameron Cameron
    13. September 2012 at 12:15

    Obama’s re-election odds rose 1.5% (from 63.5% to 65%) on the news. So much for long and variable lags!

  36. Gravatar of Saturos Saturos
    13. September 2012 at 12:20


  37. Gravatar of OhMy OhMy
    13. September 2012 at 12:26

    I understand that when the US enters a recession in Q1 due to the fiscal cliff Market Monetarists will concede that fiscal policy trumps monetary policy?

  38. Gravatar of Matt Waters Matt Waters
    13. September 2012 at 12:32

    I guess the Fiscal Cliff would be an interesting natural experiment of Keynesianism vs. Market Monetarism, although I wouldn’t want to be around to see it. Even in a pure Market Monetarism framework, the spending cuts could create mismatch and a temporarily higher “natural” rate of unemployment as the defense workers shift to new jobs.

    The defense cuts though should be the only significant effect if Bernanke stays with open-ended QE. The tax increases and cuts in transfers hurt demand generally, instead of specifically to a sector, and thus they can be offset with general monetary policy.

  39. Gravatar of Lars Christensen Lars Christensen
    13. September 2012 at 12:34


    Lets say the fiscal cliff actually is a negative demand shock, but also that Bernanke will make QE dependent on unemployment. What happens? Unemployment rise – Ben announces that he steps up QE (he just told us he would do so) and unemployment drops again. This is in fact a perfect illustration of the Sumner Critique – so yeah this is a test of fiscal policy versus monetary policy…If Bernanke sticks to his rule unemployment will not rise even if we hit a 4% fiscal cliff…the question of course is whether he will stick to the rule or not…

  40. Gravatar of Saturos Saturos
    13. September 2012 at 12:49

    Lars, Bernanke explicitly said in the conference that he could not offset the fiscal cliff.

  41. Gravatar of Mike Sax Mike Sax
    13. September 2012 at 12:57

    Bill, Bernanke doesnt have to worry about the Tea Party as Romney’s not going to win.


    “Since everyone knows that to Bernanke ‘price stability’ means 2% inflation, as soon that he feels that threshold is threatened, everyone will expect the program will stop.”

    Bernanke talked about “price stabiility consistent with low unemployment” so this is his way of getting out of the straitjacket.

    By making it open-ended and even stating he would keep policy loose after the recovery I don’t think it will go that way this time

  42. Gravatar of Lars Christensen Lars Christensen
    13. September 2012 at 12:58

    Saturos, he said – but he announced a clear rule lets say that he had a 6% unemployment target then he would automatically step up asset buying if the fiscal cliff where to push up unemployment and if the market realises this the Chuck Norris would come to his help.

    I would actually completely ignore the fiscal cliff issue if I was certain that Bernanke actually has a rule…I am still not sure about it, but I am more optimistic than for a very long time

  43. Gravatar of Bill Ellis Bill Ellis
    13. September 2012 at 13:28


    Nice. Good point.

  44. Gravatar of Rustem Sharipov Rustem Sharipov
    13. September 2012 at 13:36

    QE3 may mean that home ownership picked out and falling to its “natural” level and mortgage banks have to be rescued from MBS’s

  45. Gravatar of ssumner ssumner
    13. September 2012 at 13:44

    I recall that Bernanke was asked if the Fed was trying to offset the fiscal cliff. He said they had to react to the economy the way it is. In other words. Yes.

  46. Gravatar of Catherine Catherine
    13. September 2012 at 13:56


  47. Gravatar of Bill Ellis Bill Ellis
    13. September 2012 at 15:50

    With the Fed committing to doing a monthly action based on a vague promise of significant progress on unemployment, there is no way this does not turn into a monthly game of political football between the hard money Teapublicans and the economic pundit class. (There is as yet no significant political pro QE team. )

    The Teapublicans may not be able to derail the process (Pray to your god)…but their monthly fear mongering seems certain to add to market uncertainty and hence volatility.

  48. Gravatar of John Thacker John Thacker
    13. September 2012 at 16:10

    Bill Ellis:

    It rather seems to me that the Tea Party lead to Bernanke and the Fed taking action on monetary policy, instead of continuing to wish for action on the fiscal side.

    Still seems like the optimal election result is Obama plus Republican control of at least one chamber of Congress. History teaches us that unified Republican control would also lead to attempts at fiscal stimulus eventually.

  49. Gravatar of OhMy OhMy
    13. September 2012 at 16:27

    Lars, SS,

    “so yeah this is a test of fiscal policy versus monetary policy”

    Cool, good to know, in 3 quarters we will know for sure monetary policy cannot help end a balance sheet recession. Although it is pretty obvious if you look at the mechanisms.

  50. Gravatar of Matt Waters Matt Waters
    13. September 2012 at 22:08


    What mechanisms are those? The liabilities on one’s balance sheet are assets on another. If those assets are, say, swapped with non-interest-bearing cash, then some of the cash goes into the real economy. That cash creates demand and thus inflation, encouraging yet more cash to go into the economy.

    A liquidity trap supposedly means that the cash would definitely go into a bank vault, but why would ALL investors in such Agency MBS be fine with trading in an investment earning 2-3%, if not more, with one earning 0%? If just some do, then that creates inflation, encouraging yet more to spend, creating yet more inflation.

    Furthermore, in all this madness, rates on corporate bonds and mortgages may actually go up. The thinking is usually that lower rates mean less saving and more borrowing, which is true in isolation. But if future demand expectations go up, then the loan demand curve shifts to the right. That means higher rates and higher loan volume.

    The key is for the central bank to yell from the rooftop that it would let this process go on until we realize the central bank’s target. While it is theoretically possible for the natural rate to become extremely negative, most real world savers would choose not to lose even 2% of their wealth a year by keeping it in cash while the Fed inflates at 2% a year. Stocks, among other assets, have had earnings yields far in excess of short-term savings vehicles. As more cash has to find a home, those high yields will just become more attractive vs. 0% interest (well, really, 0.25%, which should probably be changed or something).

  51. Gravatar of TallDave TallDave
    14. September 2012 at 12:10

    Still seems like the optimal election result is Obama plus Republican control of at least one chamber of Congress.

    That’s only true in good fiscal times — Dem POTUS will try to spend more but GOP Congress will stop him, GOP POTUS and GOP Congress will agree to spend more together.

    In bad fiscal times, the GOP elects Tea Partiers who want to cut spending and are prevented by Dem POTUS, whereas GOP POTUS will work with Tea Partiers to cut spending.

    Eventually good fiscal times will return and the Tea Partiers will lose power, be co-opted (not to say corrupted), etc.

  52. Gravatar of ssumner ssumner
    16. September 2012 at 06:51

    OhMy, You said;

    “Although it is pretty obvious if you look at the mechanisms.”

    It’s pretty obvious you are wrong if you look at the markets. Real interest rates fell on the news. Aren’t real interest rates a “mechanism” in your model?

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