Bill McBride — Update: Four Charts to Track Timing for QE3 Tapering

Clearly the economy will have to pickup before the FOMC would start to taper QE3 purchases in December. (September tapering seems less likely now since the key data has been worse than forecast, but still not impossible).

Calculated Risk
Update: Four Charts to Track Timing for QE3 Tapering
Bill McBride

Lance — QE Won't Work Because There's No Demand For Credit

Traders get it. Economists, not so much.

Business Insider
QE Won't Work Because There's No Demand For Credit
Lance Roberts | Street Talk Live

Greg Hannsgen — Again, Unconventional Win Out

Who would have expected extreme thinking from central bankers? That is the theme of some coverage in the financial press over the past few weeks. For example, the Financial Times takes note that “a growing chorus of economists is saying central banks should take more radical steps, including buying assets other than government bonds.”

Some, if not all, of these steps are not so radical from a broad historical perspective. Following the recent bankers’ brainstorming session in Jackson Hole, Wyoming, Fed Chairman Ben Bernanke was said to be pondering various possibilities including (1) QE (quantitative easing) 3, (2) a lowering of the interest rate paid on banks’ reserve accounts at the Fed, (3) an extension until 2015 of the Fed’s low-interest-rate precommitment, and perhaps in the longer term, (4) adopting nominal GDP targeting, as endorsed, for example, by George Soros in a recent opinion piece on the eurozone and Germany in particular.

Today, the Fed announced that it would adopt options (1) and (3), purchasing $40 billion in mortgage-backed debt each month for an indefinite period and predicting that the federal funds rate would remain near zero through mid-2015 (news article).

Multiplier Effect
Again, Unconventional Win Out
Greg Hannsgen

John Carney — Three Things Fed Did Today It's Never Done Before

1. Open-Ended Expansion.

2. Targeted at Labor Market.

3. Not Tied To New Weakness.

This is a bold new world for Fed policy.

CNBC NetNet
Three Things Fed Did Today It's Never Done Before
John Carney | Senior Editor

Fed now targeting nominal GDP

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.

QE3 announced, ho-hum

Much ado about nothing. More asset swapping, nothing that might boost effective demand directly, and low probability it will have much of an effect indirectly either — or to increase NGDP by increasing inflation rate.

Board of Governors of the Federal Reseve System
For Immediate Release
September 13, 2012

Jobs, the Fed and a real simple way to eliminate our debt

The Fed can't do anything to stimulate demand or create jobs, however, there is one very simple thing it can do to eliminate our supposed debt.

ZH — Here Is Why Everything Is Up Today - From Goldman: "Expect The New QE As Soon As April"

Pavlov's bell.

Read it at Zero Hedge
Here Is Why Everything Is Up Today - From Goldman: "Expect The New QE As Soon As April"
posted by Tyler Durden

Includes Goldman's analysis.

Fed says it will remove income for the next two years. Markets rally.

To show you how perverted and misguided things have gotten.

Suppose you told someone that the government would remove significant amounts of income from the economy over the next two years. You could even call it a tax. Do you think that person would run out and buy stocks and other risk assets?

Absolutely not. They'd probably take whatever cash they had and hang on to it, real tight, out of fear that the economic future was about to become very bleak.

But that was the opposite of how investors reacted to today in response to the Fed's statement.

Here's what the Fed said:

“low rates of resource utilization and a subdued outlook for inflation over the medium run are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.”

That was the surprise in the statement today. The Fed EXTENDED the length of time that they would hold interest rates at zero for more than a year. (They originally said, mid-2013.)

But we know that this policy removes income from the economy. Case in point: over the last four years the Fed has removed $400 bln in interest income from the economy. That's HUGE. That's the equivalent of almost 3% of GDP. And we're only growing at 1.8%!!

Yet when investors hear this today they bought stocks...and gold and commodities and other risk assets. And they sold the dollar even though this is all hugely deflationary.

It's QE Redux. Haven't we been through this before? Everyone piles in on the false belief that this is inflationary. They push up stocks, gold, commodities and foreign currencies and then it all comes tumbling down when the buying stops.

Same, exact thing will happen this time.

Edward Harrison sums up QE1, QE2, and QE3

Edward Harrison of Credit Writedowns explains QE1, QE2, and QE3 from the Fed's announced perspective and his own views, which is consistent with MMT.

What are the differences between, QE1, QE2, and QE3?

Ed thinks that should QE3 come, it will be after the Fed has firmly established the the overnight rate at zero, when it will shape the yield curve by setting price rather than quantity, reversing the strategy of QE2.

If this happens it will be completely in line with MMT's position that the government controls interest rates as it chooses, and the natural rate of interest (overnight rate) is zero.

While this is admittedly an emergency measure, it demonstrates what MMT has been claiming as a feature of the federal government's monopoly power as issuer of a nonconvertible floating rate currency.