Friday, December 14, 2012
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. http://en.wikipedia.org/wiki/Jenga --ts