People are already talking about the Fed doing QE4, but there’s a problem with that.
QE3 is open ended, so how can we get a new round of asset purchases if the current round is never supposed to end?
Still there is one key way that the Fed can turbocharge the program.
Remember, this current round of QE is designed to keep going until the labour market improves and is robust.
But nobody really knows what that means and everyone is worried that the Fed will get fidgety and start tightening if inflation picks up before the jobs data is good.
So as we’ve written before, the Fed’s next move is likely to be a clarification of what conditions would make the Fed feel that it no longer has to keep buying assets.
In a piece at the Washington Post, Zachary Goldfarb drops a big hint that that is what’s coming next:
Bernanke [is] studying the idea of declaring that the Fed will boost the economy until unemployment reaches a specific target or until inflation takes off. Some Fed officials have suggested that the central bank keep on stimulating until unemployment reaches 7 per cent or inflation rises to 3 per cent; others have proposed Fed action until unemployment reaches 5.5 per cent or inflation rises to 2.25 per cent.
The 7 per cent employment level is that which is proposed by Chicago Fed President Charles Evans. The 5.5 per cent was proposed by reformed dove Naryan Kocherlakota in a speech last week. For the Fed to indicate that it wouldn’t tighten until one of those numbers were hit would send the clearest signal yet that low rates will be here for a long time.
Expect to see hard definitions on goals in the fairly new future.
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