Charts in the News – The Fed and QE: To infinity and beyond

The US Federal Reserve has now announced the details of what amounts to QE3. Taken together, the package of measures, of which the direct asset purchase programme is only one component, represent in our view, not only a significant loosening of monetary policy, but a change in tactics and an important re-direction of the FOMC’s primary short-run focus – away from price stability and toward lower unemployment. Indeed, there has been a notable shift in Chairman Bernanke’s tone, suggesting that he fears current high levels of joblessness risk becoming more entrenched: He recently noted “persistently high levels of unemployment will wreak structural damage on our economy that could last for many years.”

A central purpose of QE3 is aimed at trying to prevent this from happening. This marks an important shift in balance within the Fed’s dual mandate, and in some respects takes policymaking back to the future to a world in which monetary policy is directed at achieving labour market outcomes. With those concerns in mind, future asset purchases will depend directly on labour market conditions, continuing until there is a ‘substantial recovery’ in employment. The move is no doubt bold, but is not without risks. Inflationary expectations have already risen, and it is possible that a large part of US unemployment has already turned structural. If that is the case, the Fed’s latest actions may provide a boost to prices with little to no impact on output or employment.

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