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We’ve been scratching our heads a little bit lately, trying to figure out what people anticipate from the Fed on the QE3 front.We noted our surprise yesterday, when a new survey of from WSJ showed that the majority of economists did not expect to see QE3 happen this year. This was surprising, since so many sell-side research shops do think QE3 is on the way.
For example, here’s SocGen making the case for QE3 at the April meeting.
Also complicating factors is that the economy seems to doing fine, and financial markets are clearly robust, so what’s the impetus?
What does this tell us about where monetary policy should be now? Inflation in 2012 and 2013 is likely to come in around 1½ per cent, below the FOMC’s 2 per cent target. And clearly, with unemployment at 8.3 per cent, we are very far from maximum employment. At the San Francisco Fed, our forecast is that the unemployment rate will remain well over 7 per cent for several more years.
This is a situation in which there’s no conflict between maximum employment and price stability. With regard to both of the Fed’s mandates, it’s vital that we keep the monetary policy throttle wide open. This will help lower unemployment and raise inflation back toward levels consistent with our mandates. And we want to do so quickly to minimize total economic damage. The longer we miss our objectives, the larger the cumulative loss to the economy.
That’s really the bottom line. Below-target inflation and below-target unemployment. Why not do more?