Reading the Fed leaves
Neil Irwin on what the Federal Reserve's decision to not do less says about when or whether it will be willing to do more:
My best guess is that the decision of whether to resume asset purchases and expand the balance sheet is binary, not linear. If growth truly appears to be stalling out, with second half GDP growth coming in somewhere south of 2 percent (forecasts are in the 3 percent plus range now), and/or year-over-year core inflation gets below about 0.8 percent, the Fed starts to talk about the big guns. If they pull the trigger on those guns, it would be an announcement of another asset purchase program in the hundreds of billions of dollars, primarily of Treasury bonds.
What they're not likely to do is do ongoing adjustments to their target for the balance sheet, raising or dropping their goal for balance sheet size based on the latest data (though that's what at least one FOMC member, James Bullard of the St. Louis Fed, would prefer). I base this in part on how they've done these things in the past -- the previous installments of quantitative easing came in one-off announcements of very large numbers that are carried out over time. But more broadly, the exact impact of a larger balance sheet on economic growth and price levels is highly uncertain. It would be folly, many at the Fed would argue, to pretend that the tool is finely tuned enough to be constantly tweaking the size of the balance sheet in response to the latest data.
Posted by: soma_king | August 11, 2010 12:18 PM | Report abuse
Posted by: howard16 | August 11, 2010 12:21 PM | Report abuse
Posted by: soma_king | August 11, 2010 12:21 PM | Report abuse