As we warned two weeks ago in "Bernanke's Helicopter is Warming Up", it seems (from the Fed's once uberhawk and now superduperdove Kocherlakota's speech this morning) that the Fed is catching on as to what it needs to do. And what it has no choice but to do. Borrowing from the Europeans, Kocherlakota uttered those three special words:
- KOCHERLAKOTA SAYS FED MUST DO "WHATEVER IT TAKES" TO AID GROWTH
Draghi will be proud: even more proud because to emphasize his point Kocherlakota used the phrase not once, not twice, but seven times! But what is more concerning is what this means for US monetary policy's next steps. In Kocherlakota's own words "this means doing something different." We suspect, as we noted here, Nominal GDP targeting (i.e. unanchoring inflation expectations and leaving and forgetting something very heavy on the CTRL and P buttons) is on the agenda as deflationary fears continue to rise.
Doing whatever it takes in the next few years will mean something different. It will mean that the FOMC is willing to continue to use the unconventional monetary policy tools that it has employed in the past few years. Indeed, it will mean that the FOMC is willing to use any of its congressionally authorized tools to achieve the goal of higher employment, no matter how unconventional those tools might be.
Moreover, doing whatever it takes will mean keeping a historically unusual amount of monetary stimulus in place—and possibly providing more stimulus—even as: Interest rates remain near historic lows. Economic growth rises above historical averages. Per capita employment begins to rise appreciably. Asset prices rise to unusually high levels, leading to concerns about “bubbles.” The medium-term inflation outlook rises temporarily above 2 percent. It may not be easy to stick to this path.
But I anticipate that the benefits of doing so, in terms of employment gains, will be significant.
Full details on what is possible, see our full description here
For those short on time, here are the key issues courtesy of a word cloud:
Instances of word deflation? 0