QE2 Sets Sail

Finally, quantitative easing (round 2), is here.  The Federal Open Market Committee announces:

To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to expand its holdings of securities. The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month. The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability. 

That would represent a roughly 25% increase in Fed assets (currently about $2.3 trillion, including $838 billion of Treasuries); and a drop in the bucket relative to $8.6 trillion in US debt held by the public.

Will it work?  That has been the subject of considerable debate, which echoes an old-school Keynesian versus Monetarist scrap: Among the Keynesian skeptics are Paul Krugman and Mark Thoma and Joe Stiglitz, who would prefer more fiscal expansion. On the other hand, David Beckworth and Scott Sumner are more optimistic that QE can be effective.

The markets appear to be siding with the pro-QE camp.  Stock prices and the dollar are little changed today, which indicates that the announcement was pretty close to what was expected.  However, since Ben Bernanke raised the possibility of further expansion in a speech on Aug. 27, the stock market has headed up,

and the dollar has fallen (graph is the dollar price of a euro, so up indicates a relative dollar decline)

Also, a recent auction of TIPS (Treasury Inflation Protected Securities) suggests that inflation expectations are rising (see this NYT story, and this Jim Hamilton Econbrowser post).

One FOMC member is not on board: Thomas Hoenig of the Kansas City Fed.  According to the announcement:

Mr. Hoenig believed the risks of additional securities purchases outweighed the benefits. Mr. Hoenig also was concerned that this continued high level of monetary accommodation increased the risks of future financial imbalances and, over time, would cause an increase in long-term inflation expectations that could destabilize the economy.  

That is similar to the view expressed by Martin Feldstein in this FT op-ed. Another worry, expressed by Ambrose Evans-Pritchard, is that QE will start "currency wars," to which I say, "bring it on" (see this previous post).

More details on the policy are available from the New York Fed, which will implement it.

Update: Economix has a more comprehensive set of links to views on QE.  In his Times column, David Leonhardt explains how "dovish" monetary views have been vindicated.  Real Time Economics rounds up reaction from "economists and others" (Mike Pence, really?!).  In a Washington Post op-ed, Bernanke explains "What the Fed did and why."  See also: Free Exchange, Gavyn Davies, Scott Sumner, James Hamilton.