Is it more accurate to refer to QE∞ instead of QE3? Unlike the previous doses of US QE, this campaign of asset purchases has no official limit, and will carry on until the unemployment rate has improved “substantially” – a word that the Federal Reserve can define, and redefine, as it sees fit over the years ahead.
I have already argued that this should be regarded as stunningly aggressive. In the latest Note video, Gavyn Davies, a fellow FT blogger, agrees. The key point, he suggests, is that over the last year the Fed’s reaction function has changed. It is not just that the employment situation has worsened but also that, for whatever reason, it has decided to give the full employment part of its mandate greater emphasis than before. There are plenty of possible reasons for this, which we discuss in the video:
The Federal Reserve has given the markets all it hoped for and more: unlimited quantitative easing (QE3), in the form of $40bn a month of mortgage bond purchases, an extension into 2015 of the zero-rate forecast, and a change in the reaction function to say the Fed won’t raise rates until an economic recovery is well under way.
Is this Ben Bernanke’s final shot? His own words suggest not. Here’s a handy checklist of what he’s done so far, and what could be to come, as set out in his 2002 speech on how to fight deflation. These are in the order he set them out in the speech, rather than the order in which they’ve been tried so far.
Whether it likes it or not, the Federal Reserve has been pulled into the political thickets. The demand is for it to “do something”. Whatever it does at its meeting this week will have political ramifications, and you do not need to belong to the Ron Paul faction to question whether further QE of any kind is necessary at this stage.
As James Mackintosh pointed out in the Short View, inflation expectations and asset prices are both rising now, rather than falling as they were before QE1 and QE2. This Fed has a philosophical aversion to deflation, but there appears to be no imminent danger of that.