If the Federal Reserve’s communications around what it’s doing with its quantitative easing programs have seemed unclear to you (and they sure have to me) then today’s John Hilsenrath story explains why—there’s no clarity because the FOMC is full of disagreement. Along with the usual chorus of QE-haters from a handful of regional banks, Hilsenrath reveals that Bush-era holdover Elizabeth Duke and Obama appointees Jeremy Stein and Jerome Powell are both deeply uncomfortable with the QE 3 strategy and have been consistently pushing for a quick exit.
At the same time, other members of the FOMC including Chairman Ben Bernanke seem to feel that the Fed ought to follow its legal mandate and engage in monetary easing at times of high unemployment and low inflation. I have to say that what considerations exactly lead Stein, Powell, and Duke to their view that the Fed ought to ignore its statutory mandate in favor of an ill-defined mission of bubble fighting have never quite been clear to me. One section of Hilsenrath’s report seemed especially distressing:
By April more officials, including the governors, were getting worried about terms like “QE-ternity” and “QE-infinity” floating around financial markets, which suggested some investors thought the program was boundless, according to people familiar with Fed discussions. The Fed officials thought the job market had made enough progress to warrant discussing an exit.
One is tempted to reply: So what? Perhaps a deeper reply would be to ask, did anyone really think that anyone thought this? Like suppose that 36 months from now the unemployment rate is 5.4 percent, the employment-population ratio is on the rise, and the inflation rate—having been consistently above 2 percent for a year—has just spiked up to 3 percent. At the height of the use of the phrase “QE-infinity” was anyone really under the impression that under those circumstances the Fed wouldn’t tighten monetary policy? Maybe there were people like that. But I doubt it. And if there were people like that, the dual mandate itself offers useful and reasonably clear forward-guidance about the future state of monetary policy. Why would QE continue in the face of rising inflation if the unemployment rate were already really low? I can’t think of any good reason, any more than I can think of good reasons to end it in the face of high unemployment if the inflation rate is already really low.