2011-10-21

Yellen: QE3 might be warranted

Bloomberg reports:

Federal Reserve Vice Chairman Janet Yellen said a third round of large-scale securities purchases might become warranted if necessary to boost a U.S. economy challenged by unemployment and financial turmoil.
The central bank should also give “careful consideration” to Chicago Fed President Charles Evans’s proposal to tie the near-zero interest-rate pledge to specific levels of unemployment and inflation, Yellen said today in a speech in Denver.
QE3 would be nice and a pledge to keep the funds rate low until unemployment or inflation reaches some thresholds likewise. But if the Feds goal is to get unemployment down to, say, 7% unless inflation goes up to, say, 5%, why not just say that that's their goal and they will do whatever it takes until we get there? Why limit the actions to a low interest rate?

The Fed should also give careful consideration to the other option Evans mentioned: nominal GDP level targeting. The number of proponents keeps on growing.

The remarks signal Fed officials may be prepared to delve further into unprecedented monetary territory and take criticism inside and outside the central bank for expanding the balance sheet.
The Fed has increased its balance sheet to about 15% of GDP while the Swedish central bank expanded to 25% of GDP. So why is the Fed receiving so much critisism for its balance sheet?

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