Today the Fed announced Unlimited QE, meaning that it will buy bonds until the labour market improves “substantially.”The idea is that rather than announcing a program with a fixed end date, the Fed will be able to get more bang for its buck by committing not to do any tightening of any sort until thigns improve significantly.
The move was lauded by economists who have been urging the Fed to pre-commit to loose money in the future as a means of stimulating growth now.
So let’s say things stay kind of sluggish, and the Fed wants to boost things some more.
What does it do? It starts to define the word “substantially.”
Jan Hatzius at Goldman explains:
Mr. Bernanke hinted at further communication changes in an even more aggressive direction if today’s actions prove insufficient. In response to a question, he said “clarifying our response to economic conditions might be one way in which we could further provide accommodation.” We read this as openness to even more aggressive communication changes along the lines of the Evans 7/3 rule or even a nominal GDP target. While these (especially the latter) still seem quite far off, we did note with interest that Mr. Bernanke mentioned it unprompted in response to a more general question about the importance of credible commitment emphasised in Michael Woodford’s Jackson Hole study (which advocates such a target).
The Evans 7/3 rule is simply: The Fed won’t stop easing until unemployment is at 7% or core inflation is at 3%. And a nominal GDP target is just that, a target for the total size of GDP, something that can be achieved by either raw growth or inflation.
What’s clear is that the Fed has now set itself on a new course, one not defined by numbers and volumes (of bond purchases) but one defined by future commitments towards easy action.
Future guesses about FOMC decisions will now likely revolve around what the Fed says to define when it has hit its goals. These are interesting times.
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