From the latest note from Goldman’s Jan Hatzius…The real issue, in our view, is that neither Twist 2 nor QE3 is likely to be very potent unless it is coupled with “unconventional unconventional” policies. Using our GS Financial Conditions Index, we showed recently that a program of a size similar to Twist 1 or QE2 should only be expected to boost real GDP growth by about ¼ point—helpful but hardly equal to the task given the starting point. In contrast, our analysis last year—while highly simplified—showed that adoption of a nominal GDP level target could be much more effective because it would commit the Fed to open-ended accommodation, via both short-term interest rates and the balance sheet, until nominal spending had recovered a much bigger share of the lost ground. If firms and consumers built this commitment into their own expectations for future activity, prices, and interest rates, this “expectations channel” could provide a powerful boost to growth over and above the direct impact of the Fed’s interest rate or balance sheet policies themselves. However, we believe that unconventional unconventional easing remains unlikely for now.
Such is the state of the Fed. The only thing that might work is an action far beyond what the existing Fed is willing to do right now.