As Washington Barrels Toward Fiscal Cliff, FOMC Should Freeze
Doing something will be tempting since the FOMC’s so-called operation twist is scheduled to expire at year-end. The most likely measure would be to add some Treasuries, probably long-term, to the monthly MBS purchases of $40 billion per month, and cease offsetting the Treasury purchases with sales of shorter-term paper. This would end the sterilization of those Treasury purchases and cause the Fed’s assets to grow faster and presumably create money at a faster rate. To date, since QE3 was announced on September 13, a graph of the Fed’s total assets shows very little growth. Likewise, the M2 money supply has grown at an 8.4 percent rate in the three months ending November 28, not much more that the 7.3 percent growth over the past year. Actual inflation and potential inflation remain tame, as evidenced by recent prices of gold, the dollar, and TIPS. So, the temptation to do more will be great.
To ease now, however, would be to take pressure off the politicians to adopt a more responsible fiscal policy. If it becomes necessary, it can be done after the 2013 recession begins.