Suppose–Counterfactual World–That the U.S. Had Avoided Large-Scale QE since the Start of 2010…
…and that the employment, inflation, and futuer breakeven outcomes realized in that counterfactual world had been those seen in our world:
Is there any question that in that counterfactual world the FOMC would right now be actively and aggressively on the point of a massive QE program–that the only questions would be “how much” and “how quickly”?
Today, with the ending of QE, we live in that counterfactual world–with three differences:
Since the start of 2010 the FOMC has already done $2.2 trillion of QE–and has thus taken duration risk of a magnitude that the private market requires $2 billion a month to bear off of private-sector balance sheets.
As a result, whatever risks are involved in QE start from a baseline in which the private market is bearing $2 billion/month less in the amount of government and GSE duration risk than in the counterfactual world (modulus the Summers point that maturity extension has neutralized 1/3 of QE undertaken). And just what are those risks? And just how are they increased at the margin by starting with $2 billion/month less of government-issued duration risk in private-sector hands?
As a result, whatever benefits are expected from QE have been modified by what we have learned over the past 4.75 years about the benefits of QE. And just what have we learned?
Question: How do those three differences move us from being on the point of undertaking a massive QE program to it being off the table?
Question: And why is the option of regime change–price-level targeting with at least partial catchup to the pre-2008 expected price level trend–off the table as well?