2 short notes evaluating effectiveness of Fed programs

These studies will continue for a long long time. We will get many ideas on whether Fed program worked or not.

Here are 2 recent ones. One by FRBSF economist-Jens Christensen and Two by St Louis Fed economist- Daniel L. Thornton.

1) FRBSF econ saysthat Fed liquidity facilities seem to have lowered Libor. They calculate what would Libor have been without Fed programs (based on historical trend) and see Libor would have been much higher without Fed intervention.

2) St Louis Fed econ has an interesting take on Fed programs. He says Fed cut rates sharply in early part of the crisis and reallocated credit but crisis only deepened. It is only when Fed expanded its balance sheet sharply did the crisis ease. Hence, should Fed have expanded its balance sheet much sooner? He adds this could be a lesson for future crisis:

A possible lesson from these events is that financial markets and the economy might be better off if, in future financial crises, the Fed first increases the supply of credit available to the market. Additional actions can be taken if there is evidence that quantitative easing alone is insufficient. Of course, this means that the Fed must be willing to promptly, albeit temporarily, abandon its funds rate target. The inflationary consequences of quantitative easing can be mitigated by informing the market that the increased monetary base will be reduced systematically at the first signs that the economy is improving and the financial market crisis is abating.

Well, well, well. Those who thought Fed and others had done so much in this crisis so quickly, Thornton goes a step further and says it was perhaps too late . The statement is as surprising as Scott Sumner saying Fed should have eased its policies more and is still too restrictive.

What interesting times we are living in.

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