As any schoolteacher knows but the Federal Reserve will soon learn, threats and promises are the tools of the weak.
Trapped by interest rates that cannot sink below zero, the Fed, it is becoming clear, is not just preparing to engage in a massive new purchase of securities, or QE2, but is also considering a new communication policy it hopes will convince people that inflation, if not recovery, is just around the corner.
Investors expect a second round of ‘quantitative easing,’ or QE2, will take the form of increased purchases of Treasury debt aimed at keeping long-term rates low and encouraging consumers and businesses to go out and spend.
“There are special circumstances when price-level targeting would be a helpful complement to our current and prospective strategies in the U.S.,” Chicago Fed President Charles Evans said on Saturday.
“Clearly communicating an expected path for prices would help guide the public’s understanding of the Fed’s intentions while we carry a large balance sheet and promise continued low interest rates for an extended period.”