Counterparties: A hawk in dove’s clothing
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The QE3 press tour has begun. Yesterday, the president of the Dallas Fed blasted the central bank’s decision. Today, in separate speeches, the presidents of the Atlanta, Boston and Minneapolis Feds defended the monetary stimulus decision and gave us some insight into how QEternity will play out.
As part of QE3, the Fed promised to keep interest rates low till at least mid-2015. Minneapolis Fed President Narayana Kocherlakota argues that the FOMC should keeps rates “extraordinarily low until the unemployment rate has fallen below 5.5 percent”. For context, unemployment rates have not been below that level since April 2008. As Neil Irwin writes, Kocherlakota’s target is especially noteworthy because he is “generally viewed as one of the more hawkish, or inflation-phobic, members of the FOMC”. If he’s on board with QE3, Tim Duy’s conclusion that the hawks have been marginalized, or at least converted, appears true.
The Atlanta Fed’s Dennis Lockhart struck a less polemic tone in stressing the “far from satisfactory” state of the US job market. But he made a clear defense of QE3 by drawing a distinction between training America’s workforce and helping its workers in the short term: “Economic development is about jobs for people. Workforce development is about people for the jobs”. The implication: BAs and vocational training, while helpful, won’t be enough get us out of an employment crisis.
Eric Rosengren of the Boston Fed was far less subtle, delivering a speech entitled “Acting to Avoid a Great Stagnation”. In his view, the logic of QE3 is simple and emphatic: “improve economic conditions much more quickly – so the period of very slow recovery … does not persist”. — Ben Walsh
On to today’s links:
QE3 has been “manna from heaven” for big bond firms like Pimco and TCW – Reuters
Mitt Romney also believes in monetary-policy urban myths – Paul Krugman
The Fed’s legitimacy problem – Simon Johnson