2012Sep17 QE to Infinity
"Two things are infinite: the universe and human stupidity; and I'm not sure about the universe." ~ Albert Einstein
The Federal Reserve took a really aggressive stance Thursday when it announced its new round of quantitative easing. Superficially, the Fed's new tack looks a lot like a combination of what it did in the earlier rounds of quantitative easing. But the Fed's new policy is far more radical than this description might suggest. Several features of the policy mark a stark departure from past practices.
1. Open-Ended Expansion. In the past, when the Fed announced a Large Scale Asset Purchase program-LSAP, in Fed speak-it indicated its maximum size and duration. Sometimes it revisited the duration or size, expanding the programs as necessary.
But this time, the Fed has explicitly declared that the LSAPs will continue until economic conditions improve. What's more, the Fed said it would undertake additional LSAPs and employ "other policy tools" so long as the economy is underperforming. There are no definite size or time limits on QE3-prompting some to call it QE-Infinity.
2. Targeted at Labor Market. Perhaps even more importantly, the Fed's policy is very explicitly tied to the labor market.
"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," the Fed said in its official statement.
This explicit tying of the LSAP to the labor market is unprecedented.
Not only has the Fed never done this in the past, but no other central bank has launched a quantitative easing program with such an explicit link to jobs.
3. Not Tied To New Weakness. The Fed's statement was actually pretty upbeat about the economy. The only downbeat note there is about the jobs market. But that's hardly news.
What the Fed did was announce that its policy was not based on a forecast of things getting worse-but on a desire for things to improve faster. In short, it announced that the central bank intended to change the pace of recovery.
Gallons Per Paycheck:
Over the last decade, the price of gas has moved higher while wages have been driven lower.
Here's a sad chart plotting how many gallons of gasoline can be bought at average U.S. hourly wage since 1998, from Reuters.
Just in case:
Bacon as Currency: Testing the Limits of What It Can Buy
This Great American Bacon Barter adventure is sponsored by - everyone act surprised - Oscar Mayer, which sent him off with no money, no credit cards - nothing but 3,000 pounds of bacon to barter for everything he needs to get from New York to Los Angeles.
When Oscar Mayer put the question to its Facebook fans: "What would you give for 5 bricks of bacon?," they got all kinds of responses, including a Klondike bar, 5 garden tomatoes, my hat, my bicycle - maybe a secret handshake. There were a few offers for "cooking breakfast" - and then it gets weird. Someone offered their dog, another offered their son (so he won't eat all the bacon) and a few offered husbands and wives.
It's gotten him a couch to crash on in more than one city, as well as breakfast, some empanadas and hot dogs. He got a first-aid kit, some Civil War artifacts, a John Wayne poster that says, "Courage is being scared to death - but saddling up anyway," and a bottle of moonshine. In Louisville, Kentucky, some guy gave him gas money and the shirt off his back and, another guy, for 200 bricks, agreed to get a bacon tattoo!
He's still got 2,428 bricks of bacon left - let's see if, like that guy a few years ago who set out on a cross-country barter with just one paper clip, he winds up with a house!