According to Columbia University Economist Michael Woodford on a paper he authored and presented during the Jackson Hole meeting this year, he believes of all the tools remaining at the Fed’s disposal, it is Bernanke’s clear transparent communication of Fed’s time frame and commitment that is the most effective of all. He further concludes that the assets purchase and expansion of Fed’s balance sheet contribute very little to job creation, keep in mind that the Fed’s two mandates are full employment and inflation targeting. Some people would jokingly say that the launch of iPHONE 5 actually has a more profound economic effect than the whole QE3 announced. Some call on the Fed to adopt the Taylor rule that sets target GDP in stead of its current focus of setting inflationary target, the result may be debatable.
Richmond Federal Reserve President Jeffrey Lacker was the lone wolf that opposed to the central bank’s third round of quantitative easing. He believes that it is the Congress or the U.S. Treasury’s job to channel or allocate credit to a particular sector of the economy through Fiscal Policy. This implies that the Fed is worried about the upcoming Fiscal Cliff, and trying to do whatever it takes to carry the load when the Congress and the president fail to come to a bipartisan agreement on taxation and spending issues. There are studies that indicate if all the weaponry the Fed fired hit their respective targets, the most dent the Fed can do is to knock 0.4% off of the current employment rate, well short of the 2% off that is needed for a full steam recovery.
The equity market seems to be in euphoria every time the fed hint at a new round of easing, it is getting difficult to break this addiction and dependency, when the country’s political system is largely dysfunctional. All the Fed is doing is trying to reboot and instill confidence in the American Consumers. The Fed’s action is no panacea, and consumer confidence is the key to recovery, it however requires the Fiscal side to get its act straight, and take that baton from the Fed and finish the run of getting the economy back on track.