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.
