QE3: Reactions to the Fed’s big stimulus move

September 13, 2012

On Thursday, the Federal Reserve announced yet another round of quantitative easing to boost the economy. What's new about QE3, as we explained in our primer, is that this round will be open-ended — the Fed will keep injecting money into the economy until growth picks up and unemployment starts dropping significantly. Essentially, Ben Bernanke is trying to shift expectations about the future course of the economy.

So how did the rest of the world respond? Let's take a look.

— The stock market loved it. See if you can spot the QE3 rally.

— Inflation expectations jumped only slightly. Five-year breakevens, an indication of where the market thinks inflation will go, rose to 2.22 percent:

— Scott Sumner, an economist at Bentley University who has long argued for more aggressive Fed action, says the market rally proves that the Fed can boost the economy merely by shifting expectations: "Even a very vague and inadequate promise from the Fed was enough to boost markets significantly." He also argues that the Fed is taking "baby steps" toward NGDP targeting.

— Michael Feroli, chief economist of JP Morgan, argued that Bernanke has radically shifted his approach to monetary policy: "Whereas past actions were, by and large, one-off adrenaline shots, today's actions more fully embraced conditional commitment as the guiding principle behind Fed strategy." Feroli, too, predicts that the Fed will eventually move to an explicit rule where it promises to engage in stimulus measures until, say, unemployment reaches a certain level.

— Mark Thoma says that Bernanke was probably influenced by a paper released by Michael Woodford of Columbia University in early September: Woodford "delivered a paper showing that the Fed has the most impact on the economy when it credibly commits to future actions. Thus, according to Woodford, it is not the quantitative easing itself that helps the economy (i.e. how many assets the Fed holds), but rather it's the commitment to continue purchasing assets until the unemployment rate improves substantially that matters."

— Mitt Romney's campaign criticized the move: “The Federal Reserve’s announcement of a third round of quantitative easing is further confirmation that President Obama’s policies have not worked. After four years of stagnant growth, falling incomes, rising costs, and persistently high unemployment, the American economy doesn't need more artificial and ineffective measures. We should be creating wealth, not printing dollars. As president, Mitt Romney will enact bold, pro-growth policies that lead to robust job creation, higher take-home pay, and a true economic recovery."

— Justin Wolfers, meanwhile, argued that if Bernanke was trying to help out Obama, he had a funny way of showing it: "There's no sense in which the Fed's move today was political. If they wanted to help Obama, they would have done this months ago."

— Matt Yglesias offered travel advice for the Fed Chairman: "Basically Ben Bernanke better stay out of Texas." (Rick Perry, meanwhile, is definitely not a fan of QE3.)

— David Wessel pointed out the gloomy news: Even after more easing, the Fed is still predicting that the economy will remain in rough shape for years: "Even with QE3, Fed sees jobless rate above full-employment (5.2%-6.0%) through 2015."

— Indeed, at his news conference Thursday, Bernanke once again reiterated that "monetary policy is not a panacea." He also pointed out that Congress could still squelch the recovery by allowing a series of tax hikes and spending cuts to kick in at the end of the year. "If the fiscal cliff isn't addressed, as I've said, I don’t think our tools are strong enough to offset the effects of a major fiscal shock, so we’d have to think about what to do in that contingency."

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