Time for the Fed to double down
I’ve been meaning to write a longer post disagreeing with some of Matt Yglesias’s calls for a total “regime change” in how we think about monetary policy, but he’s right about this: The incipient strength in the economy strengthens the case for a surprise round of QE3, just as it does for extending the payroll tax cut and the expanded unemployment insurance benefits. This is the time for our fiscal and monetary authorities to show that they’re fully committed to making sure the recovery continues.
There are two reasons for that: One is that it will help the recovery, both by supporting it directly and by persuading businesses that a continued recovery is likely, and they should start investing and hiring in preparation for it.
The second reason is that it’s cheaper to support a recovery then fight another downturn, and so even if your interest is in getting policy back to normal, you should want the recovery to look strong enough in December 2012 that we don’t need to extend the payroll tax cut into 2013.
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