Read it at Tim Duy's Fed Watch
QE3 or Not?
by Tim Duy
Most interesting paragraphs to me:
It's no secret some Fed officials have been looking into additional purchases of mortgage-backed assets to support the economy via the housing market. And once they started talking about it, market participants began to assume it was imminent. Moreover, the idea of additional easing popped up in the most recent minutes:A number of members indicated that current and prospective economic conditions could well warrant additional policy accommodation, but they believed that any additional actions would be more effective if accompanied by enhanced communication about the Committee's longer-run economic goals and policy framework.
So now we have a timeline - first, enhanced communication. Second, additional easing....
Could the Fed credibly commit to a higher inflation target and make actionable such a commitment? I think they can, but would need to announce they are making some permanent additions to the money stock and ease the expectation that the balance sheet expansion will be fully unwound at the first possible moment. In other words, to convince the public that you intend to raise the level of the price path relative to the existing path, you need to be willing to allow for the permanent increase in the money supply that would allow that to happen. Barring that, they can target the dollar directly and do what they won't do - buy foreign currency or foreign debt. But this is now a more academic than practical discussion. The Fed has a target. Period. End of story. [emphasis added]