The Right Coast

Editor: Thomas A. Smith
University of San Diego
School of Law

A Member of the Law Professor Blogs Network

Friday, December 14, 2012

Economics One: More Monetary Policy Uncertainty

The Fed’s announcements yesterday increase monetary policy uncertainty in two fundamental ways.

Quantitative Easing on Steroids?

First, the new quantitative easing announcement implies a gigantic increase in the size of the Fed’s balance sheet and thus effectively an amplification of the policy risks and uncertainty which I have discussed, for example, in this oped with George Shultz and other colleagues in September. The Fed now plans to purchase $85 billion a month of longer-term Treasury and mortgage backed securities until there is substantial improvement in the labor market, which requires a completely unprecedented increase in reserve balances as illustrated in this chart.


Think of it as the most epic game of Jenga in history. --ts

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