Quantitative easing (QE)
[Fed Admits Another $4 Trillion In QE Will Be
Needed To Offset An "Economic Shock" zerohedge.com] "In a Fed Staff working
paper released over the weekend titled "Gauging the Ability of the FOMC to
Respond to Future Recessions" and penned by deputy director of the division of
research and statistics at the Fed, the author concludes that "simulations of
the FRB/US model of a severe recession suggest that large-scale asset purchases
and forward guidance about the future path of the federal funds rate should be
able to provide enough additional accommodation to fully compensate for a more
limited [ability] to cut short-term interest rates in most, but probably not
all, circumstances."
So far so good, however, there are some notable
problems with the paper's assumptions, as Citi head of G10 FX, Steven Englander,
observes.
He writes that the paper’s basic framework is to take
the standard US economic model used by the Fed, give it a negative shock big
enough to push the unemployment rate up by 5 percentage points (big but not
unprecedented over the last 50 years) and deploying the Fed’s policy rate, QE
and forward guidance tools to see if they are adequate to get the economy back
on track. Negative rates and helicopter money are not used.
The two simulations assume:
1.the economy is in equilibrium initially with
inflation at 2%, r* at 1%, so equilibrium nominal fed funds is 3%
2.the economy is in equilibrium initially with
inflation at 2%, r* at zero (secular stagnation) and equilibrium nominal fed
funds at 2%
He compares three policy approaches..." Full text:
Fed Admits Another $4 Trillion In QE Will Be Needed To Offset An "Economic
Shock"
Am 8:5
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