Upon Reflection, Second Thoughts On QE3
The costs to the real economy of economic policy uncertainty have recently been studied and quantified in a widely cited paper by Scott R. Baker, Nicholas Bloom, and Steven J. Davis ( Download here .pdf ).
Baker et al. focus primarily on economic uncertainty engendered by fiscal and regulatory measures. Little, if any, attention is paid to the possibility of the negative effects of elevated uncertainty about monetary policy.
The Fed's most recent initiative - QE-3 - includes some unconventional and controversial elements that go beyond straightforward quantitative easing that may increase inflation expectations, while raising uncertainty about the pace of inflation in the future.
Specifically, QE-3 makes further stimulus conditional on the outlook for the labor market. The FOMC press release after its September 13, 2012 meeting states: "If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability."
The Fed's same press release also states that, "a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens."
Tying further quantitative easing and other measures to the state of the labor market is a questionable stance for monetary policy, especially in view of the modest and diminishing labor market improvement that has followed a substantial amount of quantitative easing.
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Read more: www.realclearmarkets.com
Professor Woodford and the Fed
Gavyn Davies, Martin Brookes, Ziad Daoud and Juan Antolin-Diaz
Fulcrum Research Papers – 1 October 2012
Recent contribution of Professor Michael Woodford of
Columbia University to the debate on the future of monetary policy in the US.
Download .pdf here
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