Ryan Abvent: QEII Has Not Disappointed: It Is the Fed Itself that Has Disappointed

Barack Obama! Recess-appoint Joe Gagnon to Peter Diamond's Fed slot right now!

Ryan Avent:

Monetary policy: Who's disappointed in QE2?: BINYAMIN APPELBAUM has written a story... "Stimulus by Fed is disappointing, economists say".... I find the piece itself a bit disappointing... it provides almost no sense of against which benchmarks QE2 has disappointed.... [T]he piece does illustrate the way in which the Fed left itself open to this kind of criticism and potentially reduced its ability to respond appropriately to economic conditions.... [W]hat did we expect QE2 to accomplish? Early in the third quarter of last year, immediately prior to Ben Bernanke's strong hint that additional asset purchases would be forthcoming, expectations for growth and inflation were falling, the probability of a double-dip recession was rising, confidence was lagging, and private employers were creating around 100,000 jobs per month. This deterioration is why the Fed acted. Did the Fed hope to influence interest rates? Sure, but that's just one of the means available to the Fed as it pursues its desired ends: a stable rate of inflation supportive of economic growth.

So what happened after Mr Bernanke made it clear to markets that the Fed would act again? Growth accelerated, from a 1.7% annualised pace in the second quarter to 2.6% in the third quarter and 3.1% in the fourth quarter. Inflation expectations ceased falling and began rising back to normal levels. Confidence rose. And the pace of hiring improved.... Without QE2 it would be more disappointing still, and very probably negative.

So has QE2 accomplished what most reasonable onlookers expected?... [I]t has.... Asset purchases were designed to improve economic conditions relative to what would have otherwise prevailed. And Mr Appelbaum doesn't come close to arguing that the policy failed....

But the Fed set itself up for this kind of criticism.... The Fed chose a number.... [I]t would have been helpful to lay out a policy target and declare that they'd act until they either hit the target or concluded that hitting the target was impossible... a rate of inflation or a price level or a rate of nominal output growth or a level of nominal output. Unfortunately, the Fed didn't set a policy target.... The Fed chose a direction rather than a destination, and when its action left it short of the destination, it opened the door to criticism that the direction was wrong, when in fact it may simply have traveled an insufficient distance (perhaps thanks to unexpected headwinds). If you target a destination, you don't run into that problem.

The Fed's stimulus has not disappointed, in my view. The Fed itself, well, that's a different story.