Thursday, June 2, 2011

Laying the Groundwork for QE3?

Gauti Eggertsson of the NY Fed has a piece on their blog titled “Commodity Prices and the Mistake of 1937: Would Modern Economists Make the Same Mistake?” Its bottom line is "that it is unlikely that a modern economist transported back in time to 1937 would have preemptively tightened policy on the scale that policymakers did at the time."

The idea behind the article is that tightening by the Fed and the administration choked off the nascent recovery in 1937 and caused the the economy to turn down in 1937-38. The article speaks in glowing terms of "core CPI", which ignores food and energy prices. By using core CPI and ignoring food and energy prices, the article says that economists today are not misled by "temporary" price spikes into premature tightening of monetary policy. According to the article, ignoring food and energy prices is good, and maintaining a loose monetary policy in today's circumstance is good too.

So, while the Fed has not yet given any clear indication of QE3, in this piece they seem to me to be saying that they definitely won't be implementing any contractionary policies. Based on this piece, I conclude that the Fed won't tighten monetary policy, will keep the current easy monetary policy in place, and is perhaps laying the groundwork for further easing. In an article that appeared on Business Insider and on Seeking Alpha, Cullen Roche refers to this as a "very good piece". If the intent is to get people thinking about easy monetary policy in positive terms, it seems to be succeeding.

QE3 anyone?

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