Easing by the Fed Seems Likely, But What Form Will it Take?


 

Easing by the Fed Seems Likely, But What Form Will it Take?

Published on Economist’s View | shared via feedly mobile

Just a quick note to reinforce what Tim Duy said here. Many policymakers at the Fed would like to provide more help for the economy, but fear of inflation among other members of the monetary policy committee — enough to matter — makes it unlikely that the Fed will expand the size of its balance sheet (as another round of QE would do). The way around this is to enact or suggest policies such as “forward guidance,” “Operation Twist,” and “sterilization” that attempt to ease policy without changing the size of the balance sheet. Forward guidance, for example, tries to adjust inflationary expectations — there is an implicit promise of future action to maintain low rates, but it does not require any action when it is announced (and Fed members are den ying it was an explicit promise in any case), while Operation twist and sterilization both exchange short-term for long-term assets (sell short-term, purchase long-term) in an attempt to force long-term interest rates even lower than they already are (and hopefully stimulate investment and the consumption of durables).

If the Fed is inclined to ease more, its instinct will be to look at these types of policies first, policies that try to help the economy without increasing the risk of inflation. But as we’ve seen recently, these types of policies are also limited in their effectiveness precisely because of their cautious nature.

Of course, if Europe falls apart, all bets are off — in that case the Fed may get more aggressive. But for now I expect the Fed to continue to try to find clever ways of doing something without really doing anything at all.

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One response to “Easing by the Fed Seems Likely, But What Form Will it Take?

  1. Ah yes … the big if … if Europe falls apart.

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