We wrote the below post regarding unlimited QE ahead of today’s Fed meeting.
It turns out, the Fed basically did exactly what was anticipated by some economists: Unlimited QE.
Our explainer is written below.
Quantitative Easing — the practice of the Federal Reserve buying bonds in order to boost the economy — is already a very controversial idea. Critics liken it to money printing, and they say that Bernanke is bringing us down the road to Zimbabwe.
But if you thought that QE was controversial, get a load of this: UNLIMITED QE!
That’s what Deutsche Bank is predicting comes later today, when the Fed announces its monetary policy decision at 12:30.
So what is that?
Well in the past, when the Fed has tried QE, it’s always come with precise limits on size. So the Fed will say that it will buy $600 billion worth of Treasuries and mortgage-backed securities, but then nothing more.
But the hot buzz in economics these days is that it’s not the size of the program, but the commitment on the part of the Fed to keep money easy until the economy is well on the road to recovery.
That’s where unlimited QE comes in. The idea would be that the program would be open-ended, with ongoing bond buying until that point at which the Fed was satisfied that the economy was strong.
The program is thus transformed from being a program about bond buys to a program that seems to commit the Fed to future actions.
Economist Tim Duy has a great discussion on unlimited QE.
I don’t anticipate a lump sum QE announcement. I anticipate an open-ended commitment to regular purchases of securities, Treasuries and/or MBS, that can be scaled up or down in response to the economy. Wall Street may be initially disappointed by the lack of a big number, but over time I think markets will come to appreciate the greater impact offered by a regular commitment based upon economic outcomes rather than the arbitrary amounts and time lines of previous QE efforts.
To Duy, the big question is, what conditions the Fed attaches to ending the bond buying. It probably won’t be an explicit Nominal GPD target or even something specific like an Evans Rule (no tightening until 7 percent unemployment or 3 percent inflation). It will likely be something softer, and more along the lines of “robust data.”