So in its usual bland language, the Federal Reserve Board announced a third round of “quantitative easing,” but accompanied with “guidance” towards future monetary policy that’s a lot more expansive than most people expected. I’ll let a very excited Matt Yglesias explain:
QE3 is here, and it’s pretty big. They’ve announced a form of “open-ended” quantitative easing in which the central bank commits to “purchasing additional agency mortgage-backed securities at a pace of $40 billion per month.”
But there’s something much much much more important here than the numbers. It’s the guidance. It’s not the Evans Plan and it’s not Nominal GDP Level Targeting but it’s good and it’s right here (emphasis added):
“To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens. In particular, the Committee also decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015.”
This isn’t my dream of super-clear forward guidance, but it’s a huge step in the direction of Krugman/Woodford style precommitment. The key thing is that they’re no longer saying that accommodative monetary policy is conditional on the recovery being weak. Instead, interest rates will stay low for a while even after the economy recovers.
It will be most interesting to see conservative reaction to this step, which addresses one of their main alleged economic concerns, “uncertainty.” But it will also expose the deflationary monetary policies just under the surface of GOP rhetoric, particularly since markets are likely to jump happily. Even as some conservatives will (probably) succumb to the temptation of arguing that the Fed is acting politically on Barack Obama’s behalf, it will be very hard to disguise the impression that they are their own selves still cheerleading for a bad economy.