I was a bit over-enthusiastic in my positive reaction to the announcement of QE3+. I was excited by the fact that the Fed was finally targeting an output (employment) instead of an input, and that no limit was set for the amount of expansion required to achieve the target.
As I have run the numbers, however, my enthusiasm has diminished. This is because, aside from the fact that the program has not yet started, the programmed pace of expansion is too low. While there is no ultimate limit on the amount of MBS purchased, the amount to be purchased each month is just too small to get things going.
I say this because QE3 is much smaller than QE1 or QE2. This is true in both an absolute and a relative sense:
QE1 lasted for about six months from the fall of 2008 until the spring of 2009. The Fed bought about $1 trillion in bonds, growing its balance sheet from $800 billion to about $1.8 trillion, an increase of 125%. That was huge.
QE2 lasted for about six months from late 2010 until mid-2011. The Fed bought about $700 billion of bonds, growing its balance sheet from $2 trillion to $2.7 trillion, an increase of 35%, much smaller than QE1.
QE3 is supposed to last until the Fed’s definition of “full employment" is achieved. However, by pacing the expansion at $40 billion per month, even a one-year program will not be big enough. At $40B/mo. for one year, QE3 would be a $500 billion program, for an increase of only 17%. That just isn’t going to cut it.