The Fed edges closer to monetary stimulus

Last month I did a post describing a program that was far from optimal, but the best I thought we could hope for given the current make-up of the Fed:

The New York Fed will be instructed to buy $30 billion a week in T-securities of various maturities, until the Fed’s forecasting department is able to forecast a path of unemployment and inflation over the next 5 years that minimizes the sum of the deviation of inflation from 2% and unemployment from its long run average (or estimated natural rate.)  At that point it will stop.  If forecasts of inflation and unemployment change in such a way as to under or overshoot the previous expectation, the New York Fed will either buy or sell T-securities, as appropriate.

Lots of people sent me a FT column discussing a recent speech by San Francisco Fed President Williams:

If the Fed launched another round of quantitative easing, Mr Williams suggested that buying mortgage-backed securities rather than Treasuries would have a stronger effect on financial conditions. “There’s a lot more you can buy without interfering with market function and you maybe get a little more bang for the buck,” he said.

He added that there would also be benefits in having an open-ended programme of QE, where the ultimate amount of purchases was not fixed in advance like the $600bn “QE2″ programme launched in November 2010 but rather adjusted according to economic conditions.



11 Responses to “The Fed edges closer to monetary stimulus”

  1. Gravatar of Major_Freedom Major_Freedom
    23. July 2012 at 16:55

    Maybe schizophrenic Ben at the wheel is the problem.

  2. Gravatar of Chris Holm Chris Holm
    23. July 2012 at 17:24

    Hey Scott,

    I am studying economics at George Mason, and yesterday I listened to your podcast from a few months back with Russ Roberts. Some impressive stuff, and I just wanted to know that your commentary and insight on topics such as this led me to your blog.

  3. Gravatar of Tom Tom
    23. July 2012 at 17:27

    Having a policy that adjusts to reality — that’s what “rules” are for.

    It would be a big plus for the economy.

  4. Gravatar of Don Don
    23. July 2012 at 17:35

    If the Fed had a policy of NGDPLT, then the market purchases would not be a “stimulus” but merely adjusting the money supply according to policy. I think the phrasing matters during an election season. I don’t think the Fed will act unless the economy swoons or they start changing the terms of the discussion.

  5. Gravatar of ssumner ssumner
    23. July 2012 at 17:39

    Tom and Don, Both good points.

  6. Gravatar of Pietro Poggi-Corradini Pietro Poggi-Corradini
    23. July 2012 at 19:25

    So if NGDP level targeting is meant to stabilize and not “stimulate” and things could still go south somehow for other reasons, just not because of monetary anomalies, what would prevent the public to point to the targeting and saying “See, it’s not working”. I’m afraid the Fed has a dual purpose: to be blamed when things go wrong and then to be asked to come in and save the day.

  7. Gravatar of Saturos Saturos
    23. July 2012 at 22:40

    Chris, listen to both of them (He did another one in 2009). Then watch the videos on YouTube. It’s all great stuff. Then compare Scott’s explanation of events with, I dunno, anybody else? Left, right, you name it. Try and see if anyone can match Scott’s narrative for coherence and emprical support. Then you can start reading the articles and classic blog posts.

    Pietro, if NGDP comes in on target then the Fed is doing its job, period. The conservatives are right – monetary policy can’t fix everything. But as Scott has argued lack of good monetary policy causes other things to go wrong as well.

  8. Gravatar of ssumner ssumner
    24. July 2012 at 07:42

    Thanks Chris, GMU is now my favorite university.

    Pietro, How could people complain if NGDP growth was right on target, and RGDP growth was lousy? That would mean inflation was too high. Obviously you could’t complain money was too easy, because tighter money would make output fall even more, and you couldn’t complain money was too tight, because easier money would make inflation worse.

    People don’t even complain much about monetary policy right now, and both inflation and RGDP are too low, hence policy is OBVIOUSLY far too tight.

    Thanks Saturos. (Don’t know if you caught the old thread, but I’m not opposed to gun control either.) 🙂

  9. Gravatar of Pietro Poggi-Corradini Pietro Poggi-Corradini
    24. July 2012 at 09:52

    Scott and Saturos, thank you. My mind is changing (slowly). I’m at a point where I’d like to see these ideas be tried. Scott mentioned Australia, are they consciously pursuing a monetary policy along these lines?

  10. Gravatar of TheMoneyIllusion » Ezra Klein’s stimulus proposal TheMoneyIllusion » Ezra Klein’s stimulus proposal
    25. July 2012 at 04:57

    […] promise open-ended QE continually until certain macro objectives were achieved.  A few days ago I did a post pointing out that the Fed is now considering a similar idea.  Tim Duy sent me a link to a Jon […]

  11. Gravatar of ssumner ssumner
    25. July 2012 at 18:01

    Pietro, My sense it that it’s most by chance in Australia.

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