Worthwhile Reads – November 3rd

With the official end of QE3, Matt O’Brien at Wonkblog makes an assessment of the QE programs and explains Why the Fed is giving up too soon on the economy:

“Between higher income taxes on the rich, higher payroll taxes on the rest, and significant spending cuts, there’s been an awful lot of austerity the last few years. Enough that the economy should have slowed down quite a bit. Indeed, the nonpartisan Congressional Budget Office estimated that all this fiscal tightening would subtract something like 1.5 percentage points from growth through the end of this year.

But that’s not what happened. Consider this: the economy added 186,000 jobs a month in 2012, before all this austerity, but then accelerated, ever-so-slightly, to 194,000 in 2013 and 224,000 so far in 2014… [it’s] remarkable that the economy didn’t slow down at all despite all the fiscal tightening. And for that, we can thank the Federal Reserve…

QE isn’t magic — far from it — but it is, as Boston Fed President Eric Rosengren told me, “quite effective.” Especially at convincing markets that the Fed won’t raise rates for awhile, which is all it should be saying right now. Because the only thing worse than having to do QE is having to do QE again. The Fed, in other words, should do everything it can to make sure the economy lifts off from its zero interest rate trap before it pulls anything back.”

In the FOMC, Minneapolis Fed President Kocherlakota was the only dissenting vote in ending QE and removing “significant” when describing the underutilization of labor. On Friday he published a statement explaining his vote. Saying, “I felt that the FOMC needed to reduce possible downside risk to the credibility of its 2 percent inflation target by taking more purposeful steps to move inflation back up to 2 percent.”

Capital Economics (h/t to James Pethokoukis) reinforces Kocherlakota’s point and urges the Fed to keep an eye on dropping inflation expectations, and has some harsh words for those who would tighten too quickly or slow the entire economy as a means to battle merely possible asset bubbles:

“Of course, this assumes the Fed is watching the precipitous decline in long-term inflation expectations carefully. Unless the Fed wants to continue to undershoot its inflation target and thus return to the ZLB on short rates the next time a shock/recession hits, it should make it absolutely clear that no tightening will occur with expected inflation below the Fed’s target. In other words, the bubble hawks that have seemed to shift the consensus toward a mechanical / calendar based tightening of monetary policy sometime next year need to literally be taken out to the woodshed.”

Scott Sumner and his commenters combine to note this week’s evidence that markets again signal that more aggressive monetary policy is better monetary policy “The [Bank of Japan] says it will expand annual bond purchases to 80 trillion yen a year, up from the current 50 trillion yen… The impact on markets was swift: dollar-yen jumped 1 percent to 110.26, while the Nikkei surged over 4 percent to its highest levels since September 25… So the Japanese stock market also soared in dollar terms, and if you look at the intraday data the huge spike was right after the announcement.”

In addition to showing more aggressive monetary policy as the way to go, the shift of the Bank of Japan also provided evidence that appropriate monetary policy in one country is also good for other countries, contrary to what many have been claiming: “The last resort of the anti-QE crowd is to admit that it ‘works,’ but only in a beggar-thy-neighbor way.  Stealing growth from other countries via currency depreciation and trade surpluses.  But macro is not a zero sum game. Commenter Steve also provides the market-sourced evidence: ‘I was wondering why the S&P500 futures abruptly spiked 15 points (0.75%) at 12:45am EDT.'”

David Glasner, revisits an open letter sent to then Federal Reserve Chairman Ben Bernanke and notes that the inflationistas are not only wrong in their predictions but in their prescriptions: “My problem with the open letter to Bernanke is not that the letter failed to recognize the existence of a Keynesian liquidity trap or a Hawtreyan credit deadlock, but that the open letter viewed inflation as the problem when, in my estimation at any rate, inflation is the solution.”

Finally, StreetsBlog LA writes about the employment benefits of transportation infrastructure to prevent geographic barriers of employment by looking at a recent study done by the U.S. Census Bureau, the Comptroller of the Currency, and Harvard University.

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