debt deflation spiral

Fed policy: The road to the QE2

Earlier this year, the Fed was all about mapping the launch of its monetary policy exceptionally accommodating the "exit strategy" is in vogue. But the economy has become "exceptionally uncertain." So Bernanke has made in his testimony before Congress twice a year in July and close to that point before the Fed began to backtrack. Instead of taking an exit near normalization of the Fed is now planning to advance on the path of accommodation. The fundamental policy was also faster than was comprehensive and we heard of an exit strategy for a long time. Here is a brief story to QE2.

August 10: Vote for the Fed to avoid "perverse."

Declaration of the meeting since the August FOMC meeting the market has reported that the Fed "to reinvest principal payments of debt agency and agencies of the mortgage notes from long-term Treasury. Titles otherwise would allow "a passive policy tightening undesirable". So is as Bernanke said in his August 27 speech in Jackson Hole speech, said, "At its last meeting, the FOMC participants noted that the balance Federal Reserve thereby reducing at a time when the outlook had weakened a bit inconsistent for the Committee to provide housing money to sustain recovery. Moreover, a dynamic and bad can come into play: the further weakening of the economy resulted in lower interest rates and long-term refinancing a mortgage faster is likely to turn for uniform flow faster-MBS balance the Federal Reserve. Therefore, a weakening of economy could act indirectly to increase the rate tightening perverse passive policies. "

September 21: The Confession.

By an Act of Congress that the Fed has a dual mandate, are obliged to promote effectively the goals of maximum employment and price stability. In its September statement the FOMC, who admitted that in both figures, "Measures of underlying inflation is currently at levels slightly below those of the Judges Committee more coherent, long term, its mandate to promote employment and price stability. With the settlement of significant resources to further reduce cost pressures and expectations inflation in the long term, stable inflation should remain low for some time before rising to levels the Commission considers that in accordance with mandate. "Without saying so directly, the passage, said the Fed was acknowledging that the status quo was not acceptable.

October 1: A Talk stalking horse.

New York Fed President William Dudley spoke first of the month, clearly showing that the economy is not a place to taste the Fed does not seem capable of achieving this measure of success and timely political action and therefore more likely justified, echoed his comments, and details of the sentiments expressed by Bernanke in Jackson Hole. "Today, my assessment is that the current level of unemployment and inflation and the timing of which is likely to return to levels consistent our mandate is unacceptable, "New York, said Bernanke." Furthermore, the more this situation prevails and the U.S. economy is struggling with the current level of play and pressures disinflation, deflation, the greater the probability that a new shock would lead us away from our dual mandate objectives and closer to pure and simple. "
"While the Fed could do?" Dudley asked, in his speech. Of course, referred to the idea to expand the balance sheet of the Fed with the purchase of "Treasury securities in the medium and long-term or agency mortgage-backed securities." It figures that these purchases " long-lived assets to lower the level of interest rates in the long run by eliminating the length of private hands, respond by buying more assets long-term to date. Dudley used his example in a figure of $ 500 million purchase. I doubt he would take the opportunity to shoot more than one number and thus disappoint the market, so I think that number should be considered as a plant from which the building of the Fed I think a pre-specified limit is slightly Probably, but I do not think an initial figure will be slightly more than one potential starting point of ticket purchase will be opened, closed for economic developments.

But even more interesting word of Dudley was the tactic, mentioned that the first of "two potentially complementary ways." He said: "Firstly, we may take steps to make our current position very accommodative monetary policy more effective in stimulating economic activity providing additional guidance on what we are trying to achieve today and tomorrow … By clarifying our intentions, we can reduce the risk of deflation, or even a total spiral of debt and deflation, making it more difficult to achieve the necessary balance sheet adjustments. "This pre-commitment strategy essentially ensure that ultra-easy policy would remain in place until an inflation target is achieved of course, Bernanke's favorite, at least since I read on "Zero Bound" written by Eggertsson and Woodford in 2003. Therefore I suggest Dudley has served as President of the scapegoat so prominent and widely discuss strategy particular obligation.

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