►Fed to Spend $600 Billion to Speed Up Recovery
David Sanger and Sewell Chan/NY Times/Nov 3
The Federal Reserve, getting ahead of the battles that will dominate national politics over the next two years, moved Wednesday to jolt the economy into recovery with a bold but risky plan to pump $600 billion into the banking system.
►What the Fed did and why: supporting the recovery and sustaining price stability
Ben Bernanke/Washington Post/Nov 4
Today, most measures of underlying inflation are running somewhat below 2 percent, or a bit lower than the rate most Fed policymakers see as being most consistent with healthy economic growth in the long run. Although low inflation is generally good, inflation that is too low can pose risks to the economy – especially when the economy is struggling. In the most extreme case, very low inflation can morph into deflation (falling prices and wages), which can contribute to long periods of economic stagnation…Critics have, for example, worried that it will lead to excessive increases in the money supply and ultimately to significant increases in inflation.Our earlier use of this policy approach had little effect on the amount of currency in circulation or on other broad measures of the money supply, such as bank deposits. Nor did it result in higher inflation.
►World stock markets rally on Fed move
Julia Kollewe/Guardian/Nov 4
Stock markets around the world rallied today as investors welcomed the US Federal Reserve’s long-awaited decision to pump more money into the American economy.
►Fed Plan Lifts Asian Markets
Shri Navaratnam, Wei-Zhe Tan and Phani Kumar/Wall Street Journal/Nov 4
“It was a wild night …but with QE2 in the bag, the market might start to view positive U.S. economic data in a more bullish light,” said Macquarie Private Wealth adviser Shannon Briggs
►Will It Work?
Scott Sumner/The Money Illusion/Nov 3
…the market movements over the last few weeks seem to be telling us that QE2 is likely to provide a modest boost to the economy, and that a double dip recession is less likely than in August. But overall the future still looks bleak. The Fed’s action fell pitifully short of what was needed. At a minimum, I would have liked to have seen enough stimulus to raise 5 year TIPS spreads to 2.0%, instead they merely rose from 1.61% to 1.65%.
Paul Krugman/The Conscience of a Liberal/Nov 3
Conventional monetary policy involves buying short-term government debt; it has no traction now because interest rates on short-term debt are near zero.
So now the Fed is buying longer-term debt — but still only 5-year debt, with a current interest rate of slightly over 1 percent. How much more effective is that likely to be?
And $600 billion really isn’t a lot when you’re trying to move a $15 trillion economy.
►Comments on FOMC statement
Bill McBride/Calculated Risk/Nov 3
Goldman Sachs believes that the FOMC will announce additional purchases throughout 2011 and probably into 2012 totalling about $2 trillion for QE2. (not counting reinvestment). If so, this is just the beginning of QE2 …
►FOMC Statement, 11/03/10
Stephen Williamson/New Monetarist Economics/Nov 3
Today’s FOMC statement was much as expected…Note that, in spite of the fact that Bernanke and others on the FOMC have been quite explicit about the 2% inflation target, they do not put that in the statement. They also do not say what the unemployment rate is that they view as being consistent with “maximum employment.”…the FOMC is retaining the change in policy from the August 10 statement, which would have simply replaced mortgage-backed securities and agency securities that run off with long Treasuries. In addition to that, the Fed is committing (as long as nothing unexpected happens) to the purchase of long-term Treasuries, at the rate of about $75 billion per month, until the second quarter of 2011. This represents an increase over an 8-month period in the stock of outside money of about 45% at an annual rate. Given the experimental nature of this action, it is of course sensible that this is a contingent plan that can be revised in light of new information. I’m as curious as anyone to see what happens.
►The Fed shouldn’t be “solving problems,” their job is to avoid creating problems
Scott Sumner/The Money Illusion/Nov 3
The Fed should be trying to target expectations. Right now inflation expectations are too low. Of course NGDP targeting would be better, but if they are going to insist on targeting inflation, then at a minimum they should do enough QE to raise inflation expectations to 2%, and preferably a bit higher to make up for the recent undershoot. That’s not “disaster,” that’s what happens when the Fed does its job.