My take: The Fed should announce that it will do $100 billion a month of quantitative easing until market expectations are for a rapid return of nominal GDP to its pre-2008 growth path.
And it should say that if that doesn't work, it will do $200 billion a month.
It might not work. But what is the downside?
The US will make little progress tackling high unemployment before 2014 unless the Federal Reserve eases policy further, one of the central bank’s leading officials has warned in the run-up to a meeting next week where the option of “QE3” will be on the table…. In an interview with the Financial Times, [John Williams] forecast that unless “further action” was taken, there would be a lack of progress in boosting the jobs market – where the unemployment rate has been stuck around 8.2 per cent since the start of the year – over the next 18 months….
Mr Williams warned of “pretty significant” downside risks to the US economy from the eurozone crisis, the looming “fiscal cliff” of spending cuts and tax increases, and the dangers of a global slowdown. If the Fed launched another round of quantitative easing, Mr Williams suggested that buying mortgage-backed securities rather than Treasuries would have a stronger effect…. He added that there would also be benefits in having an open-ended programme of QE, where the ultimate amount of purchases was not fixed in advance like the $600bn “QE2” programme launched in November 2010 but rather adjusted according to economic conditions…