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Friday, October 01, 2010

Is the Fed Waiting for the Election to be Over Before Making a Decision on QEII?

There is news today that the Fed is moving closer to what has come to be known as QEII (QEI was the expansion of the Fed's balance sheet from around 800 billion to 2.3 trillion, and QEII would increase the size of the balance sheet even further -- though if they do move to QEII, how much and how fast that balance sheet would be extended is not known).

Just a quick thought on why they are waiting until November 3, the day after the midterm election, to make a formal announcement (the next FOMC meeting is a two day meeting on the 2nd and 3rd, and the press release will come on the 3rd). I have always believed that the Fed is reluctant to be viewed as taking policy positions that might influence national elections. Thus, when an election is coming, the Fed is hesitant to make large, activist changes in policy since one side of the political fence or the other will see the move as working against their interests. (Prior to 1980 the Fed often eased slightly before elections, probably showing an abundance of caution in an attempt to avoid being accused of doing anything that would make the economy worse in the pre-election time-period -- though some people tell a political business cycle story about the pre-election easing. But, in any case, there's no evidence of a consistent tendency in the run-up to elections after 1980 when the Fed changed its operating procedures).

So we probably should have expected all along that the Fed wouldn't even consider making a large change in policy until the election is over. I think it's a mistake for the Fed to put political considerations ahead of what is best fopr the economy, but it seems to me that is what they are doing.

I'm wondering, though, do you think this is right? Or is there some other reason the Fed has waited so long to make this decision? Is it just a coincidence that the announcement will come the day after the election, a coincidence that is due to accumulating data finally overcoming foot dragging and reluctance at the Fed to admit more help is needed from monetary policy?

    Posted by on Friday, October 1, 2010 at 01:01 PM in Economics, Monetary Policy | Permalink  Comments (21)


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