Given today’s Fed policy news, I thought I’d do a follow-up on my morning post. Here’s David Wessel:
This is exactly backwards. The Fed could easily do 10 times as much QE as they announced today, perhaps much more. And as far as cutting rates to zero, a move to level targeting of prices would be 10 times more powerful. The Fed has barely scratched the surface of what it can do.
In contrast, Congress and President Trump have used up much of their fiscal ammunition over the past 5 years, leaving it very unlikely that fiscal policy will play a significant role going forward.
BTW, kudos to Jay Powell and the rest of the FOMC. It’s just a first step, but a welcome move nonetheless. I’ve long advocated abolishing reserve requirements, and that step was taken today. Here are two questions:
1. Is the new interest rate on reserves set at 0.1%? I did not see that announced. I’ve also advocated abolishing IOR. Why not go to zero? [Update: IOR was set at 0.1%.]
2. Will this lead banks to hold dramatically lower quantities of vault cash (which were formerly held as a way of meeting reserve requirements?) Maybe at 0.1% it doesn’t matter, but at higher rates it might.
READER COMMENTS
Jeff B
Mar 15 2020 at 6:48pm
Hey Scott,
Is there any kind of layman’s tutorial on these topics? I particularly enjoy many of your posts, and then there’s the monetary ones that fly right over my head even though they are usually pretty topical to the news of the day like this one.
Just wondering if there is a cliff’s notes introduction so I can make better sense of things!
Scott Sumner
Mar 15 2020 at 7:43pm
Over at TheMoneyIllusion, right column, there’s a link to a short course on monetary economics. I wrote a book, which I expect to be published next year. I have a number of policy papers available online.
Don Geddis
Mar 15 2020 at 9:44pm
Here is a direct link to Sumner’s Short Intro Course on Money.
Garrett
Mar 15 2020 at 9:31pm
The 10y Treasury yield rallied 32 bps from 0.96% on Friday to 0.64% today. TIPS don’t trade on Sunday’s so we’ll have to see the impact on breakevens tomorrow morning.
Garrett
Mar 16 2020 at 10:58am
The 10y TIPS yield went UP 4 bps from Friday. As of now the 10y inflation breakeven is 0.74%
Garrett
Mar 16 2020 at 11:27am
WSJ:
Also quotes Larry Summers calling this a liquidity trap.
Brian Donohue
Mar 16 2020 at 2:16am
Powell has been riding the tiger from almost day one, but he came up big today. Attaboy Jay.
Aleksandar
Mar 16 2020 at 7:54am
Scott,
What would happened, in this situation in real economy if NGDP level targeting is a public policy and full employment is reached?
What new jobs will people do to offset lost jobs?
Rodrigo Escalante
Mar 16 2020 at 8:47am
Hello Professor,
is the market saying this is too little too late?
Did not expect the market to drop 10% on the announcement of QE.
Recession probability now at 80% after the announcement.
Scott Sumner
Mar 16 2020 at 11:48am
A recession may be inevitable regardless of what they do, but they should do much more.
Michael Rulle
Mar 16 2020 at 1:49pm
Glad to see you give some Kudos to Powell—-he never would have done this a few years ago. He is battling the likes of Greg Ip and other zero bounders who would not be able to find bullets in a gun shop.
Unless there is some offsetting economic activity happening to counter closing every business that involves people —-I don’t see how there is not a massive —-short term at least—-recession. In my nice open aired countryside of north central New Jersey restaurants are closed, stores literally out of most meat and paper goods (so people are the inventory holders), no theaters or sports, all schools closed (but does that matter economically?—-maybe not), so many people not working and will not get paid—-sounds like a demand problem (no pay)—and a supply problem (no restaurants, no sports)
But, restaurants deliver, liquor stores are doubling their orders and more, you can still pay for Amazon movies and online gaming. Need less gas, but use more electricity. Can still travel——but to where? Places with no shutdowns—-like Idaho.
When one reads what Korea is doing (what is their “exit strategy”—-we still need that, don’t we?) it does make one feel that whatever this thing is—-exaggerated or not—-it can be made acceptable to people’s psychology. So—-when will that happen here? Later rather than sooner it seems, but it will.
This is one of those times you want to be the party out of power (e.g., 2008) so you can spend all that value added time blaming the other guy. I fear we may be creepy crawling up to polices, like fall of 2008, where people believe “Government to the rescue” just in time for Democratic Left’s takeover of all 3 branches of government.
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