Federal Reserve Policy statement: March 19, 2014

As expected, the Fed announced further tapering, reducing bond purchases to $55 billion per month.  Also as expected, the Fed removed its reference to the 6.5% threshold as an indicator of when it would consider raising the federal funds rate.  How did financial markets react?  Yields on short- and long-term bonds rose quite a bit.  Why?  One reason is hidden in its economic forecast.  If one compares the March 2014 forecast with the December 2013 forecast, the median forecast for the federal funds rate rose from 0.75% to 1% for the end of 2015 while the median forecast for the end of 2016 rose from 1.75% to 2.25%.  In other words, members of the FOMC now anticipate raising the federal funds rate a little earlier in 2015 and expect rates to rise more quickly than previously thought.

For further information about the Fed's latest economic forecast, see my economic forecast web page.

Fed Begins to Taper

The Fed announced that they will reduce their bond purchases by $10 billion (will now purchase $75 billion per month).  It emphasized that future tapering depends on economic data; further tapering will take place if the labor market continues to improve and/or inflation rises from its current low rate.  At the same time, it stated that the "Committee now anticipates, based on its assessment of these factors (labor market, inflation, financial developments), that it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6-1/2 percent, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal" (words in italics added for clarification).   This represents a change from previous statements in which it stated that 6.5% unemployment was its threshold (though not a trigger, as emphasized by Ben Bernanke).  In other words, previous statements said that the federal funds rate wouldn't be raised until unemployment declined to at least 6.5%.  However, the unemployment rate has fallen more quickly than expected, not because of a very strong job market, but due in part to a declining labor force participation rate.  Thus, the unemployment rate by itself is not the best gauge of the labor market.  In the statement released today, the Fed stated that it will consider various measures of the labor market, not just the unemployment rate.  Prior to today, most economists expected the Fed to begin to raise the federal funds rate in 2015.  What about now?  According to projections released by the Fed today, most members of the Fed still anticipate that the federal funds rate will begin to increase in 2015.

What's the key takeaway?  The Fed thinks that the economy is strong enough to begin to reduce the amount of stimulus, though it still needs significant stimulus.  It thinks that the recent decline in inflation is temporary and that inflation will increase somewhat in the next year or two (so deflation is not a serious threat).  Though it changed the wording of the unemployment threshold leading to an increase in the federal funds rate, this is expected to have little impact on the timing of the increase.

The Fed's Latest Announcement Regarding the Direction of Monetary Policy

As expected, the Fed announced this afternoon that it will continue QE3 without tapering, for now.  In addition, it released its latest forecasts for the economy.  What are the headlines?  During the press conference following the announcement, Ben Bernanke said that, if the Fed forecast turns out to be correct, the Fed will probably begin tapering its purchases of bonds later this year and end QE3 by mid-2014.  Also, a large majority of FOMC participants anticipate the federal funds rate beginning to increase in 2015.  The initial response of the market has been a sharp decline in stocks and a significant increase in interest rates with the ten-year bond rising to 2.33%, the highest since March 2012.

Let's take a closer look at the Fed's view of the economy.  First, it should be noted that the projections are those of each of the 12 district banks, not the Federal Reserve itself (i.e., not the Board of Governors or Ben Bernanke).  The table below show the central tendency of the forecasts, which is the range of forecasts after eliminating the 3 highest and 3 lowest forecasts for each variable. 
 

	2013	2014	2015
Economic growth	2.3 to 2.6%	3 to 3.5%	2.9 to 3.6%
Unemployment rate	7.2 to 7.3%	6.5 to 6.8%	5.8 to 6.2%
inflation	0.8 to 1.2%	1.4 to 2%	1.6 to 2%

note: the forecast for the unemployment rate is for the end of the year

In addition to the forecasts, the Fed noted that it thinks the downside risks to the economy have subsided (less risk of a slowdown).  The forecast for economic growth for all 3 years is somewhat more optimistic than that of most private forecasts, but the other forecasts are in line with other forecasts.  What are the implications for monetary policy?  The Fed has announced thresholds (their word, not mine) for inflation (forecast above 2.5%, 1-2 years in the future; it relies on a forecast of inflation since it takes time for monetary policy to impact inflation) and the unemployment rate (6.5%) for when they are likely to consider increasing the federal funds rate.  Today, Ben Bernanke suggested that QE3 would likely end as the unemployment rate reached 7%.  Given that the Fed expects the unemployment rate to reach 7% in Spring/Summer 2014, QE3 will likely end around that time (if their forecast is correct).  Since it will preceded by a gradual reduction in bond purchases, the tapering will likely begin in late 2013.  Ben Bernanke emphasized that if the data shows a slower economy (including a higher than expected unemployment rate), QE3 could be extended further into 2014 (and thus tapering may not start until sometime in 2014).

What are the key takeaways from the latest news from the Fed?  It is more confident about the strength of the economy, but still thinks it requires stimulus.  In addition, it provided some clarification as to when it would begin to taper and eventually end QE3, though the exact timing is dependent on the data.  As of now, it expects that tapering will begin later this year with QE3 coming to an end by this time next year.

Fed announcement: 12-12-12

The Fed broke more new ground today in it's policy announcement.  As expected, with the end of Operation Twist (selling short-term securities and buying long-term securities), it now plans to purchase long-term Treasuries ($45 billion per month) in addition to $40 billion worth of mortgage-backed securities each month.  If you do the math, that's about $1 trillion per year (for comparison purposes, net purchases were $2 trillion over the past 4 years).  How long will continue with such a loose monetary policy?  Rather than saying until things get better, the Fed got specific.  To quote:

"the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored."

Ben Bernanke will discuss this at his news conference this afternoon, but here's what they're thinking.  Inflation is low and is expected to remain low for quite a while.  The Fed is comfortable as long as inflation stays close to its medium-term target of 2%.  Specifically, high inflation is now defined as a medium-term forecast exceeding 2.5% (medium term means 1 to 2 years from now).  In addition, inflation expectations need to be contained (not sure what their gauge will be, but possibly based on the TIPS market).  Assuming that inflation is under control, the Fed will keep the federal funds rate between 0-0.25% as long as the unemployment rate is above 6.5%.  Why 6.5%?  The Fed considers NAIRU to be between 5.2% and 6%.  What does that mean?  The Fed thinks unemployment would have to fall below NAIRU for there to be upward pressure on inflation; 6.5% gives it a cushion given that monetary policy takes some time to have an effect (and takes some time to reverse those effects). 

Key points:

• So rather than stating that interest rates will remain low until the economy improves or as long as inflation is contained, the Fed has now stated what that means.  Recall that the Fed has a dual mandate - low inflation and low unemployment.  It now has stated specifically how achieving both parts of that mandate will guide their policy in the coming years.
• It should be noted that the Fed statement says the federal funds rate will remain low as long as unemployment is above 6.5% and expected inflation is less than 2.5%.  That doesn't necessarily mean that it will engage in quantitative easing (bond purchases) for that same period.
• When is unemployment is expected to decline to below 6.5%.  Based on the December Fed forecast, this will take place in 2015, while most private forecasters think that won't occur until late 2015 or 2016 (see my economic forecast page).

QE3!

The Fed has just announced a new round of quantitative easing (QE3).  Specifically, the Fed announced that it will start buying $40 billion worth of mortgage-backed securities per month (conditional on the performance of the labor market) and continue Operation Twist for the remainder of the year (sell short-term securities, buy long-term securities, $45b/month).  Also, it indicated that it anticipates maintaining low interest rates through mid-2015.  The goal is to reduce long-term interest rates, particularly mortgage rates, with the hope of increasing borrowing and spending in general and providing support to the housing market in particular.

How did financial markets react?  I'm writing this at 12:45pm (15 minutes after the announcement).  The initial reaction is a 0.5% increase in stock prices as well as some increase in gold & silver.  However, oil and gas prices have not risen.  What about long-term interest rates?  Yields on ten-year Treasury bonds have risen significantly, from 1.72% prior to the announcement to 1.82% as of 12:50pm.  Why would the yield on Treasuries increase?  Some possible reasons include the fact that the Fed is going to purchases mortgage-backed securities instead of Treasuries and concerns about higher inflation.

Was it the right move?  Argument in favor of it includes the weakness of the economic recovery (economic growth below 2% in the first half of 2012 & unemployment above 8% accompanied by subpar job growth).  Also, inflation is running below 2% (the Fed's target).  The hope is that lower long-term interest rates will spur growth providing some support to the recovery.  That said, Ben Bernanke and other members of the Fed know and hae stated that there are limits to any benefits.

Arguments against include that this will probably have a very limited effect on economic growth.  Interest rates are already near historic lows.  Also, though overall inflation is below 2%, core inflation is close to 2%.  Energy prices are already rebounding from recent declines, so overall inflation will rise in the coming months (beginning with tomorrow's inflation report).  Also, as mentioned in a previous post, expected inflation as measured in the market for TIPS (treasury-inflation-protected securities) is not that low (break-even inflation over the next five years is about 2.1% and rising somewhat in recent weeks compared to significant declines prior to QE1 and QE2).  Also, this will complicate the Fed's exit strategy.

What's the take away?  Though the Fed has discussed the limits to another round of QE3, it chose to implement a new round of quantitative easing.  It did make it contingent on the performance of the economy, so if the economy strengthens, it could choose to stop QE3 after a few months.  More likely, it will continue well into 2013.  Also, it can't be accused of trying to finance the budget deficit since it chose to purchases mortgage-backed securities instead of government bonds.  What's my initial take?  I would have voted no.  I don't anticipate significant benefits and I think it introduces more distortions to financial markets that may be hard to unwind.  Do I think it will lead to rapid inflation?  Not anytime soon.  I wouldn't be surprised if there are more posts on this topics in the coming days.

Recent Monetary Policy: the Role of the Velocity of Money

I just read an article which mentioned that the velocity of money declined to its lowest level since the 1930s.  What's the velocity of money?  It's a concept developed by economist Irving Fisher in the 1920s and considers the average number of times a typical unit of money is used in transactions in a given year.  The following chart shows the behavior of the velocity of money over the last 50 years:



This post will primarily address the criticism that Fed policy is inflationary or has little impact by considering the role of velocity.  To begin with, let's define a term that may be unfamiliar to most noneconomists, the velocity of money.  Some classical economists used to assume that velocity was relatively constant, but this has not been the case in the last 50 years.  Looking at either the chart above (showing velocity) or below (which shows the percent change in velocity), it's apparent that velocity tends to decline during recessions and rise during periods of more rapid economic growth (i.e., money gets used more during periods of strong growth).



What happens if the velocity of money declines but the amount of money doesn't change?  If the same amount of money is used less often, spending declines as does the economy.  Thus, it's important for the Fed to increase the money supply to offset significant declines in velocity in order to stabilize the economy (note: it shouldn't micromanage small changes, but should intervene to offset singificant declines such as that seen in 2009 - see above).  the following chart shows the behavior of the growth of the money supply in recent decades:



Thus, the Fed offset the large decline in the velocity of money in 2009 by increasing the money supply.  When we add the two effects together, we obtain the following chart, which shows the demand for goods & services in the economy:



What do these charts show?  In the late 1970s, the velocity of money was increasing by about 7%.  The Fed did reduce the growth of the money supply, but not enough, allowing it to grow by 7.5%, resulting in a surge in demand and high inflation.  Meanwhile, in 2009, velocity was plummeting and the Fed offset some of this decline, but the result was still declining demand of about 2.5%, resulting in declining inflation (and a temporary period of deflation in late 2008).  Is current Fed policy inflationary?  Given historical economic patterns, the answer is no.  There hasn't been a period of high inflation when demand has been running at its current rate.  It becomes an issue when its time for the Fed to implement its exit strategy.  That is, when velocity begins to increase again, it will need to remove the stimulus in order to stabilize the economy and keep inflation in check.

Fed Policy, June 20, 2012

The Fed announced an extension of Operation Twist, which will continue through the rest of 2012 (was supposed to expire this month).  For those not familiar with Operation Twist, it involves the Fed selling some of its holdings of short-term Treasuries coupled with an equal purchase of longer-term Treasuries (designed to reduce long-term interest rates, which more directly affect the interest rate on most loans).  How did financial markets respond?  A few minutes of volatility followed by little change in market interest rates.  Why?  Normally when the Fed eases policy, it purchases Treasuries, introducing more funds into the financial system (Treasuries are removed from circulation, cash enters the system).  With Operation Twist, it puts some in and takes some out, resulting in no change in funds in the system.  The main purpose is to try to reduce borrowing rates somewhat, though the effect is limited at best.

On a related note, the Fed released its new economic forecast.  It now expects even more modest economic growth and little change in the unemployment rate through the end of 2012 (ending the year between 8% and 8.2%; the current unemployment rate is 8.2%).  Inflation is expected to be less than its target (target is 2%, inflation is expected to be between 1.2 and 1.7% due to lower energy prices).  2013 is expected to continue to be a continuation of the modest recovery, with small declines in unemployment and low inflation.  In fact, unemployment is expected to remain above 7% through at least the end of 2014.

What about QE3?  The bar is set pretty high.  In order to implement a new round of quantitative easing, there needs to be a perception of possible deflation (as in 2008 (QE1) and 2010 (QE2)), recession (declining GDP/significant increases in unemployment), and/or financial contagion from Europe (financial markets freezing similar to 2008-2009).  A continuation of a modest recovery would only result in minor attempts at easing (reinvesting interest earned on its bond holdings, continuation of Operation Twist, etc.).  Other than preventing another collapse as in 2008, monetary policy can only have a limited effect on today's economy (given record low interest rates and banks holding over $1 trillion in excess reserves).

By special request, here's a discussion of monetary policy and the economy.  For the last several years, some have warned that inflation will spin out of control because of QE1, QE2, and other forms of stimulus implemented by the Fed.  The basis for their argument is that the money supply is growing too rapidly and too much money is chasing too few goods, which results in high inflation.  So why hasn't inflation risen much above 3% in recent years?  One reason is that some are confusing the monetary base (which consists of bank reserves and cash in circulation) with the money supply (bank deposits and cash circulation).  The monetary base has experienced explosive growth since 2008, but the money supply hasn't grown nearly as much.  Since the collapse of Lehman Brothers in mid-Septmber, 2008, the monetary base has grown at an annual rate of 37%, but the money supply has only grown by 4.5% per year (though that has risen recently).  Why?  Because banks are holding onto a record amount of excess reserves (S1.5 trillion as of April 18, 2012).  Next, is there a chase taking place?  Going back to Irving Fisher, economists have made use of the equation of exchange to estimate this chase by multiplying the money supply (M) by the velocity of money (V).  How has this behaved over time?  The chart below estimates the chase by considering the percentage change in MV:



You'll note that it grew rapidly in the 1970s, resulting in inflation (as expected).  However, it dropped significantly during the recession and is still growing only modestly, thus suggesting that inflation is not a threat at this time.

What happens when banks start lending those excess reserves? Excess reserves declined by $100 billion in the second half of 2011, but have since stabilized.  If banks start loaning large amount of excess reserves, the money supply will begin to expand rapidly and inflation becomes a threat.  That's why it's critical for the Fed to have an exit strategy (which Ben Bernanke has explained on repeated occasions; for example, click here).  Having a strategy and executing it well is easier said than done.  In the mid-2000s, the Japanese central bank implemented QE and then withdrew it without igniting inflation, so it can be done.  On the flip side, how likely is QE3?  Bernanke has stressed that the primary rational for QE1, QE2, and a possible QE3 is to avoid deflation.  A sluggish recovery with moderate inflation doesn't justify QE3.  Barring another perceived (or actual) threat of deflation, QE3 would seem to be unlikely.

What's happening with bank lending?  Here's a table that traces bank lending in its many forms.  Commercial and industrial loans rebounded nicely in 2011, but real estate and consumer loans continue to languish.

The principles of monetary policy that existed prior to the Great Recession still appear to hold true.  Given that the money supply is not expanding at a rapid rate by historical standards and given that there's no chase, inflation is not a threat in the near term.  If conditions change and the Fed sits idly by, inflation could be an issue down the road, but this is unlikely to occur.  Executing the exit strategy will be difficult (too soon could stifle the recovery, too late could lead to higher inflation than desired), but chances are the mistake is likely to be relatively small, making high inflaiton unlikely.  On a related not, break-even inflation according to the TIPS market is 1.91% over the next 5 years and 2.19% over the next decade, suggesting that financial markets are not concerned about inflation any time soon.

More on the Fed and Monetary Policy

Besides announcing that it has adopted a policy of inflation targeting, there was other interesting news from the Fed today.  In a continuation of the increased transparency introduced since Ben Bernanke became chair, the Fed released the forecasts of the expected future target for the federal funds rate.  Believe it or not, back in the early 1990s, the Fed didn't even inform the public of the current federal funds rate (financial markets had to figure it out on their own).  Alan Greenspan increased information somewhat, but Bernanke came in with a goal of increasing transparency so both the public and financial markets can better understand the Fed's policy.  Of course he didn't expect to have to deal with the worst financial crisis since the 1930s, which required a nontraditional, complex response.

The Fed also released the consensus forecasts of the Federal Reserve District Banks (click here).  In the past, the Fed was overly optimistic about the future state of the economy.  This time, it lower its forecasts, indicating a modest recovery for years to come.  Inflation is expected to be at or below its target for the next several years while unemployment is expected to decline only slowly due to moderate economic growth.  Given this forecast, the Fed indicated that it expects to keep the federal funds rate exceptionally low through late 2014 (emphasizing this was conditional on their forecast; that is, if the economy turns out to be stronger than expected, interest rates would increase sooner).

Of course the Fed continues to be criticized from both sides.  Some complain that it should be doing more given the relatively weak economic recovery while others think it's doing too much.  Personally, I enjoy being able to comment on the policy instead of being the one responsible for implementing the best policy, given all that's going on in the global economy!  As mentioned in previous posts, the biggest unknown is the severity of the European Debt Crisis.  If it leads to financial contagion, expect the Fed to loosen policy even further in an attempt to cushion the US economy from the financl fallout.

Fed's policy decision

The Fed didn't make any changes in policy; leaving in place Operation Twist, reinvestment of interest on US Treasury bonds into mortgage-backed securities, and reiterating that it expects economic conditions to warrant exceptionally low interest rates through mid-2013.  A couple of items of note in the FOMC statement are that economic growth did pick up somewhat in the third quarter, but that "there are significant downside risks including strains in global financial markets."  In other words, it's paying close attention to what's going on in Europe and how it's affecting the global financial system.  In addition to its statement, the Fed released its latest economic forecast (actually, the forecasts of the 12 regional Fed districts).  Economic growth is expected to pick up slightly in 2012 (2.5-2.9%) and increase further in 2013 (3-3.5%), resulting in a slight decline in the unemployment rate to 8.5-8.7% by the end of 2012 and 7.8-8.2% by late 2013.  Inflation is expected to moderate in the coming years, with both core and overall inflation coming in at 2% or less through at least 2014.

Is there any big news coming out of the meeting?  Not really.  The Fed's forecast is now inline with those of private forecasters (it updated its forecast months ago but didn't make it public until today).  If its forecast holds true, the Fed will probably continue its current policy, so QE3 or any other significant easing is unlikely, barring a surprise.  What could go wrong?  The Fed remains quite concerned with what's going on in Europe and is prepared to act in the event that the European debt crisis significantly hurts the US economy.

A Brief Note on the Limited Power of the Fed

Some people give the Fed too much credit while others give it too much blame.  As an example of the limits of the power of the Fed, consider the aftermath of Operation Twist.  Briefly, Operation Twist is the Fed's latest attempt to try to stimulate economic growth by selling short-term Treasury bills and buying medium-to-long-term Treasury notes and bonds.  By purchasing medium-to-long-term bonds, it hoped to reduce interest rates that would more directly affecting borrowing (consumers and businesses tend to borrow for long periods of time; 5-year auto loans, 30-year mortgages, etc.).  After declining to about 1.7%, the yield (interest rate) on ten-year Treasury bonds rose to 2.4% yesterday, despite the Fed's actions.  Financial markets are much bigger than the Fed and thus many other factors have a larger impact on interest rates.  In this case, reduced fear over the European debt crisis along with perceptions that the US economic growth is slightly stronger than previously expected reduced the attractiveness of US bonds, resulting in a significant increase in market-based interest rates. Though the Fed is powerful, its power is limited.

Rick Perry vs. Ben Bernanke

Though I don't want to dwell on politics much in this blog, sometimes it's a hard subject to avoid.  Rick Perry renewed his attack on Ben Bernanke yesterday, stating "We would put someone in who actually believes that the private sector is how you stimulate the economy -- not by printing more money at the Fed."  Does Ben Bernanke think that printing money is the key to economic growth?  Here's part of Bernanke's speech in Cleveland last night (note: this is not the first time that he made these points):

"In a nearly half-hour prepared speech, given as part of the Clinic's "Ideas for Tomorrow" series, Bernanke talked about lessons that can be learned from emerging market economies such as China and Korea. Some of the common threads of success stories include low inflation, deregulation, privatization, fiscal discipline and the reduction of tariffs and the removal of other controls on exports and imports."

Low inflation, deregulation, privatization, fiscal discipline and freer trade - those sound like policies that conservatives would embrace; policies that seem to rely on the private sector for economic growth.  Bernanke added:

"Monetary policy can do a lot but it's not a panacea. It can't solve all of the problems..."

I don't think Operation Twist will be that effective and QE2 had a limited impact, but clearly Ben Bernanke recognizes that the private sector is the key to sustained economic growth.  However, he doesn't have a say on fiscal discipline, trade policy, or regulations that affect non-financial businesses.  It's disingenuous to blame him for budget deficits and other economic policies that are beyond his control.

Operation Twist

As expected, the Fed announced that it's going to implement operation twist - selling $400 billion worth of short-term securities and buying $400 billion worth of longer-term securities.  In addition, the Fed plans to reinvest funds from mortgage-backed securities (MBS) into MBS rather than treasuries.  The goal is to reduce long-term interest rates in general and long-term mortgage rates in particular.  How much of a difference will it make?  Perhaps a little, but not too much.  Mortgage rates will probably decline somewhat, but that depends on other factors as well (whether new economic data indicates weakening of the economy, investors seeking safe-haven plays, etc.).  In addition, the Fed stated that there are significant downside risks to the economy, which is the primary reason it thought it needed to provide further stimulus.  The initial reaction of financial markets was a major decline in stocks and record-low yields on ten-year bonds.  In addition, the dollar strengthened against the yen, euro and pound.

Politics and the Fed

Research and practice indicate the it's best for central banks to be independent of the political process.  In fact, since the 1990s, central banks in most economies have become more independent.  Exceptions include Venezuela and Argentina - two countries now experiencing very high inflation.  Recently, the Fed has come under increasing criticism from politicians from both the left and the right.  While Presidents Reagan and Clinton honored Fed independence, the times seem to be changing.

Yesterday, the Republican leaders of Congress, in a move not seen in recent history, sent a letter to the Fed that urged it not to engage in any further stimulus.  It should be noted that they added that if further stimulus is implemented, it should make the case for the stimulus.  Of course anyone who follows the Fed knows that the Fed always makes the case for its policy by releasing a statement explaining its policy decision (you may disagree with its case, but it provides support for its decision).  Why would the Fed want to engage in stimulus?  It expects inflation to be close to its stated goal (close to 2%) while economic growth and unemployment are awful (do I think they should do more stimulus today?  Keep reading).

On the left, Rep. Barney Frank wants to keep Fed district presidents from being voting members since he thinks they tend to focus more on inflation than economic growth.  However, many Fed district presidents are the strongest proponents of more stimulus (president of Boston Fed, Chicago Fed, etc).

Though I may not agree with every decision that the Fed makes, members of the Fed are thoughtful and have a much better understanding of the economy and monetary policy than members of Congress and most politicians.  For example, a presidential candidate explained that he doesn't like Ben Bernanke because he thinks there's too much government spending.  Of course, Ben Bernanke is not involved in government spending.  There are many other examples in which politicians have displayed a lack of understanding of monetary policy (as well as other issues!).  Shouldn't elected officials have a say in what the Fed does?  The President and Congress set the guidelines for Fed policy and have given it two mandates - low inflation and low unemployment.  Congress can change that to a single mandate of low and stable inflation.  One of the early supporters of that approach was Ben Bernanke.  However, he recognized that, since other factors can have temporary effects on inflation and policy takes time to have an effect, low and stable inflation is an intermediate term goal (in other words, a change in Fed policy today would have a significant impact on inflation until 2012, so it need to consider the likely direction of inflation instead of the current rate).  Would a single mandate have kept the Fed from implementing QE2?  Ben Bernanke has emphasized that one of the primary motivations behind QE2 was to prevent deflation, so a single mandate linked to inflation wouldn't have made a difference.

Should the Fed implement more stimulus today?  If I was a voting of the Fed, I  would vote no (I also leaned against QE2).  Monetary policy is very stimulative already and most of the current economic problems today won't be solved by even looser policy.  The Fed may want to save their remaining ammunition in case of another crisis (which may result from sovereign defaults in Europe).  One last point - is inflation out of control and, as Newt Gingrich state in a recent debate, is Ben Bernanke engaging in a highly inflationary policy?  The facts thus far indicate that inflation has been lower under Ben Bernanke than almost any other Fed chair.  In addition, financial markets expect inflation to remain under 2% per year for the next decade (based on the TIPS market).  Also, while some economists have tried to make the case for higher inflation (more than 2%), Bernanke has rejected that approach and emphasized that the Fed still seeks a medium term goal of 2% inflation.  So Bernanke's goal is clearly not higher inflation.

Though I would have made different decisions than Ben Bernanke and the Fed, I think Bernanke is being unfairly maligned as politicians look for easy targets to blame for the state of the economy.