Photo: Michael Woodford, Columbia
Michael Woodford, the world’s top monetary policy economist, who presented an influential paper at Jackson Hole two weeks ago on how the Fed should target nominal GDP, gives us his take on the Fed’s move towards unlimited QE:The FOMC’s statement marks a step beyond recent approaches to providing policy stimulus, in two important respects.
First, the Committee more clearly links the duration of its accommodative policies — both continued lower overnight interest rates, and continuing asset purchases — to the degree of improvement in the economy, and not just to a calendar date. They are still not as explicit about the conditions that will justify policy normalization as I would have recommended, but this is nonetheless an important and useful step, which should be more effective in increasing confidence that the economy will recover.
Second, the additional asset purchases announced today consist entirely of agency MBS purchases, rather than long-term Treasury securities as under the Fed’s last two programs. This type of purchases is more likely to be controversial on political grounds, but is also more likely to influence the costs of private borrowing, and so likely to have a more direct effect on the economy.
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