Monetary Policy

Fed’s Tapering of QE3 Has Begun

/ Edward Thater / Leave a comment

So, despite the consensus of pundits I reported in this post, the Fed has begun tapeing off its third round of quantitative easing earlier than expected, known in economist parlance as QE3. Apparently, the Fed is taking it slow and wants to be cautious about its reduction of quantitative easing so as to not jeopardize the current recovery. The Fed’s stated unemployment rate target is 6.5%, and most pundits seem to feel that the Fed won’t start to raise interest rates until April of 2015. But the pundits were also wrong about when the Fed would start easing off the gas peddle that is quantitative easing, so take those predictions with a grain of salt.

On an addtional note, Janet Yellen has been sworn in and started her tenure as the first female chair of the Fed. Obviously, she’s not even a full week into the job yet, but it seems she will break with Ben Bernanke’s policy of putting the Fed’s cards on the table and going to great lengths to explain what they were doing and way. Instead, it seems she prefers the style of Alan Greenspan: speak rarely, do what you think is best, and don’t worry about the pundits. So where will the Fed be headed for the next year? Your guess is as good as mine, but watch this space.

Janet Yellen before the Senate Banking Committee

/ Edward Thater / Leave a comment

If you happen to follow the Federal Reserve, then you are aware that Ben Bernanke’s tenure at chair of the Fed will be up soon. President Obama has nominated Janet Yellen to the post, making her the first woman nominee. There doesn’t appear to be too much push back from the Senate, and in all likelihood she will be confirmed as the first woman chair of the Fed. You can read a good description of the hearing, including Yellen’s articulation to her intention to continue QE3 into the future, here.

It’s worth noting that, despite the obscurity of the position, the chair of the Federal Reserve is probably the most influential person in the U.S. economy, in many ways much more influential than the President or Congress. In that regard, I think you could classify this breaking of a glass ceiling on par with Nancy Pelosi becoming the first woman Speaker of the House.

What do you, dear readers, think of Yellen as a pick? A victory for modern feminism? Smart/ disastrous continuation of the Bernanke policies? Sound off in the comments.

Fed Continues QE3

/ Edward Thater / Leave a comment

When the Open Market Committee of the Federal Reserve met earlier this week, it decided to continue its third round of quantitative easing, known as QE3, until at least its next meeting in six weeks.

Quantitative easing is a technique of monetary policy where a central bank, in our case the Federal Reserve, will purchase financial assets for freshly “printed” money, thereby increasing the money supply and stimulating the economy. The basic idea is this: all macroeconomic slow downs, recessions and depressions included, are ultimately caused by a reduction in the overall spending by economic actors. This reduction is aggregate spending has a multiplier effect, because my spending is someone else’s income, which ripples across the economy and causes a bigger drop in gross domestic product than the actual reduction in spending. (For a more detailed discussion of the multiplier effect, you can read my earlier SLACE post about the shutdown and its economic effects.) With more money in circulation, economic actors can build up savings in weaker economic times and yet still have enough money left over to go and spend at their old levels. Of course, this can lead to inflationary pressures, with too many dollars chasing too few goods, so the Open Market Committee has to walk a fine line.

QE3 is already the the largest round of quantitative easing since the 2007-2008 recession, and it is on pace to be the largest round of quantitative easing ever. Critics of quantitative easing policies are asking the legitimate question of whether we will see a crash of asset prices, in particular in the stock and real estate markets, after the Fed decides to scale back QE3 since it has been pumping $85 billion into the economy every month since last fall. However, with GDP growth still relatively anemic and no signs of inflation on the horizon, most Fed watchers predict the Open Market Committee won’t begin scaling back until sometime well into 2014, at the earliest.

As an aside, dear readers, we here at SLACE would love for you to leave us some comments and let us know what you think about our posts. In particular, if you have economic topics you’d like to see blogged on in the future, let us know and we will try to accommodate.

Fareed’s Take: “Restoring the American Dream”

/ Matthew Clemente / Leave a comment

Fareed’s Take: “Restoring the American Dream”

Yesterday, Fareed Zakaria GPS began with “Fareed’s Take” on poverty, education and the American Dream.

Here is a description of the commentary:

A recent OECD report points out that the U.S. is one of only three rich countries that spends less on disadvantaged students than others, largely because education funding for elementary and secondary schools in America is tied to local property taxes. So by definition, poor neighborhoods end up with badly funded schools. In general, America spends lots of money on education but most of it is on college education and most is directed towards those already advantaged in various ways.

What’s clear from all this research is that countries that invest more heavily in all their children’s health care, nutrition, and education, well-being more generally end up with a much stronger ladder of opportunity and access than America. Now, that is something we can change and with relatively little money. So if we want to restore the American dream, we now have the beginnings of a path forward.

For more, read the Washington Post column