More Non-Traditional Monetary Policy, Finally

The FOMC announced today that it intends on purchasing up to $300 billion in long-term treasuries over the next six months. Additionally, it is open to further expansion of it's balance sheet through the purchase of up to $750 billion of agency mortgage-backed securities.

This is the type of policy that we feel can be extremely effective in the current environment, especially through the creation of inflation expectations. An increase in inflation expectations will likely stimulate spending in the private sector (creating the feeling among consumers and small businesses that my $1000 dollars today won't be worth $1000 a month from now). I will be the first to admit that this won't return us to the level of consumption we saw pre-financial calamity, but it will have a positive affect on economic activity in the near term (more so than building a skate board park in East Wichita).

This is certainly a step in the right direction in terms of policy.

Is the ECB Still Worried About Inflation?

As I argued previously, I feel that the Fed should be employing a more aggressive monetary policy in the current economic environment (liquidity trap theories and all). However, we should be thankful that we have Bernanke, and not Trichet running the central bank. The actions taken by the ECB thus far seem mind boggling. The fact that they are still at 1.5% target rate given the extreme adversities facing the Eurozone is amazing and will in hindsight prove to be a massive policy mistake. The weakness associated with the rigidity placed on monetary policy given a diverse set of individual economies under a single currency is rearing its ugly head.