The announcement today was significant in that the Fed stated no particular size or duration of the operation. They basically said it would continue indefinitely until the economy improves. So the Fed seems to be targeting GDP and if so, this would be a first.
But here’s the thing: this has to work. It’s what everyone has been screaming for, for a long time. It will be a test as to whether or not the Fed really can target GDP or target anything other than an interest rate for that matter. I can say I am an expert at starting fires, but I cannot guarantee that if I start a fire everything in the neighborhood will burn down. I can only guarantee that I can start a fire.
If it doesn’t work—which I believe it can’t—then confidence in the Fed’s ability to target GDP will be shattered. In the long-term that could actually be a good thing, because it will hopefully get us back to where these problems are really dealt with—fiscal policy—and get us off the false notion that the Fed has cures.
9 comments:
I don't know Mike. Since the Fed has not actually announced an NGDP target, then even if it is secretly targeting NGDP, nobody will ever know whether they hit the target or not.
The true believers are never convinced anyway. Even after 30 years, the monetarists are still claiming the Fed can target the money supply, even thought the Volcker Fed tried and failed to hit such targets. The monetarists just say he didn't do it right.
This is not NGDP targeting. If it were, they'd explicitly say so- that's key for those that believe. Moreover, they still indicated that 2% inflation is still their objective in the minutes. So it's still the traditional target.
Also, everyone in the press and blogs were talking about open-ended QE as an option, and no one considered this NGDP targeting.
I'm not say NGDP targeting would or would not work, and what they're doing now would not be similar, but you're not going to sell the true believers on this being NGDP targeting.
Here's a link to the press conference:
http://www.ustream.tv/recorded/25383441
wh10 This is not NGDP targeting. If it were, they'd explicitly say so- that's key for those that believe. Moreover, they still indicated that 2% inflation is still their objective in the minutes. So it's still the traditional target.
Right, the Fed sees the risk-reward ratio going against them with NGDP targeting. Their credibility is already in shreds.
Mike you said:
"If it doesn’t work—which I believe it can’t—then confidence in the Fed’s ability to target GDP will be shattered. In the long-term that could actually be a good thing, because it will hopefully get us back to where these problems are really dealt with—fiscal policy—and get us off the false notion that the Fed has cures."
Really, whether you're right or wrong this is a good thing then. Either you're right and we can put it to be and at least have some new, defnitive knowledge, or it actually works-which also gives us new knowledge.
So it's a win-win. For my part I want fiscal stimulus but we don't have the Congress for that. So I'll take what I can get. The main thing that there is no Mitt Romney Presidency. What happened today is probably helpful in that regard-though at this point Obama should win.
It already targets it implicitly - inflation + a measure of potential growth. In that sense, there's no reason to make it explicit because it's just a signpost, and should never be a target - there are too many variables, the major one being the mix between real growth and inflation .. You can hit the target, but with the wrong mix, a different and ultimately unquantifiable set of contingent reactions take place that undermines the entire purpose.
Regardless, this is retarded policy, and precipitous at that. Refusal to keep Bumping bank profits with no discernible real macro effects (true of ALL QE periods, wherever practiced) just might have caused Congress to think harder about their actual role in the economy - ie. not the one they ceded to the Fed 30yrs ago. Perhaps that's too much to ask.
As the inevitable fiscal cliff looms, the Fed now has no ability to engage further it's 'confidence experiment' at the appropriate time. Let's face it, there will be no sign of legislative agreement this side of the election/Christmas, so a further move on the part of the Fed will likely be considered a reaction to impending disaster. Increasingly smaller payoffs for QE alright! But maybe the timing has more sinister undertones ... The cynic in me suggests that if the Fed Chair (and others) are going to lose their jobs based on a (choke, vomit) Romney Presidency, then it is in their interests to hasten policy ... By the October FOMC it will be too late, clearly.
Apj
One other thing that may be different is that they have stated this policy now as a flow rather than a stock:
" the Committee agreed today to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. These actions, which together will increase the Committee’s holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative."
Maybe they think an open ended statement as to the stock measure of how much they intend to buy and instead here just say they are going to buy $40B/mo as far as the eye can see (MBS) will act to lower certain interest rates... I have my doubts.
Under QE2, which really crushed bonds and elevated rates, they were buying about $110B per month or about $5B to $6B per workday at the best price they could "get for the taxpayer"...
I say this probably puts a lid on bond prices and a floor under interest rates for a while...
rsp,
The Fed's forecast below may offer some clue as to why the market reactions today were rather lukewarm.
http://www.federalreserve.gov/newsevents/press/monetary/fomcprojtabl20120913.pdf
Apparently, the Fed doesn't think it's going to work very much and it reveals that it's targets are too low.
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