Everyone's waiting for a Federal Reserve Open Market Committee statement today. Here's what you need to know:
First off, you really ought to dismiss talk of whether the Fed will do something or do nothing or how much more will they do. There's no quantum of action for monetary policy. Anytime a regularly scheduled statement occurs, the Fed is doing something very important—issuing the statement and adjusting expectations for the future. The question is simply what will the Fed do.
There are a lot of expectations of some kind of QE3. I'd be for that. I'd be for more QE rather than less and more open-ended QE rather than small-bore QE.
But what really matters isn't how much QE the Fed does—how many assets they buy with freshly printed money—it's what they say they're trying to achieve. If they say they're concerned by recent weakness and just want to bump us back up to a bit, that means we'll keep grinding along with a disappointing recovery. The only real game-changing possibility would be for the Fed to state explicitly that they want to push the economy up to a higher nominal growth trajectory. That they want some Reagan-style bounceback and are perhaps willing to endure a year or two of Reagan-style 4 percent inflation. I think it's extraordinarily unlikely that the Fed will make that kind of conceptual leap, and if they don't, nothing will really change.
Another thing to watch for are the dissents. When the Fed decides to issue a milquetoast statement, will any "doves" dissent and call for pro-growth action?