Walking a tightrope over Niagara Falls is how American Enterprise Institute scholar John Makin explains the Fed’s bold new approach to monetary stimulus:
“Success will be exhilarating, but failure will be ugly,” he says.
In an economic outlook paper released Thursday, Makin dissects a policy whose abstruseness might easily obscure the true risks and rewards at the heart of a Fed policy the AEI scholar terms not QE3 but rather QE3+. What is new and particularly bold about this new iteration of monetary easing is the open-ended nature of the Fed’s commitment. As the key line in last Thursday’s Fed announcement put it:
“If the outlook for the labor market does not improve substantially, the committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability.”
Makin calls the unconditional nature of these continued asset purchases “extraordinary” for three reasons. First, they are to continue indefinitely until the labor market improves; second, no allowance is made for the possibility of failure, despite the fact that asset purchases to date have not given labor markets the boost policymakers have sought; third, the statement is ambiguous about what the Fed’s policy response to inflation might be.
Moreover, in assuring markets that its accommodative stance will endure through at least through mid-2015, the Fed is signaling a willingness to tolerate rising inflation.
Says Makin: “We are looking at a ‘whatever it takes’ monetary policy that may result in a much weaker dollar and higher gold and stock prices as the United States exports deflation (stronger foreign currencies) into a world of weak demand growth.”