In case you missed it, the Fed announced QE3 today. QE1 and 2 were kind of the same, but QE3 is different. Oh so different. Sometimes the sequels are worse than the originals, like Crocodile Dundee, Home Alone, Jurassic Park, or… ugh, The Matrix. But sometimes they’re better. SO MUCH better, like Star Trek vs Star Trek II. This is one of those times.
I’m not going to describe the purpose of QE as I assume our esteemed reader(s) is well versed in monetary policy, but I do want to point out a big reason why this round is different. In our current system, it takes a lot of pressure for the Federal Reserve to budge on monetary policy. A lot of this has to do with needless inflation hawks constantly on the lookout for any sign that CPI might tick 0.0001% upwards, and political pressures over misunderstandings of monetary policy. It’s pretty easy to fire up a crowd by yelling “THEY JUST PRINT MONEY,” nowadays.
Thus, this leads to a vicious Fed cycle. No helpful monetary policy unless the situation is utterly terrible. Once monetary policy starts to help, the utterly-terrible motivation goes away, and we have to revert back to status quo policy. If the situation worsens again, it needs to become utterly terrible again before monetary policy can help. I hate to use the car analogy, but it’s like stomping on the brake while you’re on the onramp. (By the way, don’t do that. I hate those people).
So what can the Fed do to break the cycle? It can say it’s going to engage in a round of QE until the economy has obviously recovered. It won’t simply stop QE at the first sign of a recovery, but instead it will fix the policy and market expectations until the economy is obviously out of the mini-depression. Indeed:
“[Policy] will remain appropriate for a considerable time after the economic recovery strengthens”
FINALLY. Now, time for some new fiscal policy (LOLCONGRESS) and we might actually, ahem, improve our economy.