Is QE deflationary: an update
Turns out quantitative easing is deflationary - at least the Federal Reserve thinks so. Today the Fed announced that the interest and capital repayments from the bonds it bought last year will not be retired from the system (which would reduce the money supply). Instead, they will use them to buy new Treasury bonds. Via Mark Thoma: ...the Fed will keep “securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities” Now I hate to say I told you so, but I told you so ... There is, however, a point more important than my self-satisfaction: whether this policy will work. Unfortunately this policy adjustment appears to reveal a basic uncertainty in the Fed's goals. By making ad hoc adjustments like this, the Fed keeps the rest of us off balance - we don't know what it will do next because its signals are too vague. In some cases this kind of policy is desirable - regulators and...