Krugman says, "don't get your hopes up."
Perhaps he's correct in thinking that the Fed cannot do that much, but my intuition was that when the Fed pumped $1.5 trillion into financial markets in a span of three months at the end of 2008, it did seem to have an impact.
Secondly, when Japan recently announced a paltry QE package of $100 billion, the yen actually did depreciate. This helps Japan's manufacturers, and so it employment, plus it tends to be inflationary as the price of imports rises (even if there is no complete pass-through). And imports are a higher share of US GDP than Japan's, and even with the US they are probably 3-4 times what they were back when Krugman got his Ph.D.
The Fed could also cut the discount rate -- as this "small" thing was big enough to make an impact on the dollar, which is now at .75, and in the last Fed minutes, several governors wanted to raise it again. It could also stop paying money to banks to hold money at the Fed -- which they are required to do anyway. This is "free money" for the banks, and encourages them not to lend. (And I could understand why this was done in the heart of the financial panic, but not why it continues...) Plus, it could still use traditional monetary policy and cut the Federal Funds rate, which is at .25 to either 0 or .05%. And, no, I don't believe this would be problematic for technical reasons.
Bottom line is that if the Fed announced, tomorrow, $500 billion in additional QE, I would be shocked if 1) it was not accompanied by a Wall Street rally, 2) the dollar did not fall by at least 1% vs. other major currencies. Which isn't saying it shouldn't do more. But what it can do is not limited to that.
Both the people at the Fed and Krugman seem to have unrealistic expecations about the power of inflation targeting, and, in general, the power of words when they aren't backed by anything. Krugman is correct that the Fed should have a higher inflation target, but I think the larger problem now is that the Fed hasn't showed a willingness to actually do anything to hit its already too low inflation target. Hence, the Fed using stronger language about "extended low rates" isn't likely to make many consumers go out and spend.
Krugman is correct not to get our hopes up though. Whatever the Fed does, it will be extremely measured, and it will not be enough to get us back to low unemployment anytime soon. From the Wapo article, on QE, the "Fed leaders view such a strategy as likely to have only a small impact on the economy and as carrying a risk of slowing growth."
Risk of slowing growth? How's that exactly?
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