The Corner

Here’s What the Fed Is Planning to Replace QE With, in Latin

The Federal Reserve will end its “quantitative easing” bond purchase program this month, meaning that monetary policy, ceteris paribus, is going to get tighter (though it’s been getting tighter for months now as that program has been tapered to a close). But most of the Federal Reserve board doesn’t want to tighten monetary policy right now — as Michael Strain explained in a recent Washington Post column and Corner post, wages are barely rising in real terms and, while the unemployment rate has now dipped below 6 percent, the labor market is still nothing to get excited about. Inflation remains quite low, and most recently, future inflation expectations have dropped to where, in the past, the Fed has initiated quantitative easing.

There are a couple Fed governors who think we need to tighten policy sooner because inflation is likely around the corner — Richard Fisher and Charles Plosser — but the Fed is planning to keep policy loose.

But QE is over, so what is there to do? One Wall Street analyst has a handy new acronym: “VE,” for “verbal easing,” meaning assurances in the board’s statements that rates will stay relatively low for a while, which makes policy effectively looser. The summary of the term, from Business Insider:

For numerous political and economic reasons, it is highly unlikely the Fed would begin another QE program that includes asset purchases for some time, likely on the order of years, after finishing its current program. But breakevens are indicating that the Fed will have to do something to sate the market’s expectations. 

Misra writes that the Fed’s method to ease in the coming months would most likely happen via “jawboning,” or what some have called “verbal easing.”

Misra writes that this could involve Fed officials refocusing the market’s attention on inflation expectations . . . and suggest that the Fed could exercise additional patience before raising interest rates. Basically, the Fed would emphasize that it could keep rates, as the popular refrain has gone over the past few years, “lower for longer.”

As that indicates, this isn’t a new policy: VE is just a catchier way to describe what’s been called “forward guidance” — chairman Janet Yellen or the committee’s stating that the bank plans to keep interest rates at a certain low level for a certain amount of time. That probably will work to prop up inflation expectations and keep policy relatively loose, but it’s a much weaker tool than QE was.

But it’s clear that the central bank isn’t quite ready to let go of monetary stimulus in some form, and we’ll see how realistic that is without asset purchases. To adopt Catullus, the Fed’s saying, aVE, at QuE vale.

Patrick Brennan was a senior communications official at the Department of Health and Human Services during the Trump administration and is former opinion editor of National Review Online.


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