Bryan Caplan  

Why Did the Fed Commit to Quantitative Easing the Day After the Election?

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The Fed's new policies are arguably as important as the election itself.  How can we explain the timing?  There are two main families of hypotheses:

Family #1: The election changed the minds of Bernanke and company.

Family #2: Bernanke and company made up their minds before the election, but waited for the day when their announcement would be maximally overshadowed by other news.

Where does the truth lie?  Please show your work.


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COMMENTS (20 to date)
Jody writes:

They made up their minds earlier, but did not want to influence the election.

Jim Glass writes:

What Jody said.

And it was the right thing to do.

Hyena writes:

They made up their minds earlier, but didn't want to risk legitimacy by making an announcement that would be construed as electioneering.

Adam writes:

The idea that the Fed did not want to influence the election by announcing yesterday doesn't hold up--the announcement's been heralded for months with the expectation that it would be about 500 billion. So the information's been out there--and I doubt that it influenced the election at all.

The announcement did turn out to be much bigger than expected. I suspect that the large size was the reason it was announced yesterday. The announcement got some review in the news, but not the detailed examination it would get on a slow news days. When the close examination and criticism does come, it will not be good (see John Taylor's comments).

In any case, the examination and criticism is coming--the price of gold is up $22 this morning and the prices of other commodities are popping.

Damian writes:

Considering their last meeting was in September, do they ever make major announcements between meetings? If they do, then it would seem fishy what they did. What's the history there?

chipotle writes:

Professor Caplan,

When you ask us to "show [our] work," you're asking us to demonstrate the impossible.In other words, you're asking us to present evidence that we don't have access to.

Put more snarkily, do we look like mind-readers?

Jonathan writes:

I believe by asking you to "show your work," he is asking you to defend your statement in advance by defining any conclusion to include the method by which it was deducted.

It is not mind reading. You have an opinion and are able to argue its merits, but that is not the same as showing how the facts of the matter shaped the final analysis.

Reasonable - and what a good professor should request of his students.

Unfortunately, I don't know enough about QE2 to offer any insight. Mark me present but unprepared.

kurt writes:

The DJIA was up 0.24% yesterday, volume not higher than normal. So #1 seems a bit hard to accept.

Laurie writes:

You have not included what my vote is for:

Family #3: Bernanke made up his mind before the election, but waited for the day when the announcement would not affect the elections because he knew it might be unpopular with constituencies who vote for those in Congress who support big government--be it for big fiscal or for big monetary policy.

Showing my work: Far be it from me to suggest that Ben Bernanke has ever had any bias about influencing elections or throwing his support to any constituency that butters his personal bread.

For example, I can't imagine that Federal Reserve Chairman Ben Bernanke could ever have given any thought to the upcoming 2008 elections or his upcoming reappointment or his desire to have a role in history when he bailed out bank after bank starting in March 2008 and then continued to bail out more banks and even orchestrated Congress, the President, and the Treasury Department by his claiming it was an emergency, in September and October 2008 to bail out more than just banks in the economy with TARP and more.

Clearly I am biased. Ben Bernanke is a benign, brilliant, beneficent, highly educated, and prescient Fed Chairman. Eh? His background in Keynesian economics could not possibly have influenced his behavior as Fed Chairman; and his personal incentives could not have influenced his own desires to stay in power, right?! Surely no one with an academic education at a higher institution could be influenced or misled by personal incentives just because he is in one of the jobs described as one of the most influential in the world?

Dr. Bernanke knows who spreads his political bread with the best quality olive oil. His opponents have criticized him for not easing the money supply. The timing of his announcement confirms that his actions are about politics, not economics. Creating an asset portfolio for one's job opportunities is one economics lesson Ben Bernanke has learned well.

Peter St. Onge writes:

I'll take bachelor #2.

Election outcomes were in line with predictions (Intrade, fivethirtyeight).

Arnie writes:

Adam is correct that we knew it was coming. The announced new money printing that they announced had already been priced into the stock market since not much happened there. Commodities bumped up - but maybe Jimmy Rogers sneezed and it made those investors nervous.

Laurie - well said.

Though and all, it is still possible that Bryan's very question which reveals his suspicion that it was timed to be overlooked could be quite correct. The markets that must respond will do so, and the "Big Government spending us into oblivion" cat calls would be minimized in the press. No, I can't show my work. Unless you care to read the memoir of my entire life's experience to see why I might have arrived at such a conclusion. Here goes: my lemonade stand as a 7 year old showed me......

[Minor name edit made for clarification--Econlib Ed.]

JPIrving writes:

It is consistent with the notion that the Fed wants to discredit Obama. First they wait to make sure the Republicans win a sufficient number of seats on Nov 2nd and then goose the economy (but not too much) on Nov 3rd to make the Republicans look good without causing a full recovery.

They have saved the big guns (cutting interest on reserves and level targeting) for when/if a republican becomes president after the 2012 election, and because almost no one understands the impact of IOR they can claim to have already taken bold steps to boost the economy.

dave smith writes:

I agree with Peter St. Onge. #1 must be false, since who could have been surprised by the elections? They occured almost as predicted, so they could not have changed anyone's mind.

liberty writes:

I may be misinterpreting the above comments, but humorous if not: it seems those who might vote red suspect Bernanke of giving aid to Democrats by waiting until after the election to something unpopular, while those who might vote blue suspect him of waiting until after Republicans take control to do something that will aid the economy...

Elvin writes:

The Fed determines the date of its meetings well in advance, back in 2009, I'd guess. I'm sure they deliberately scheduled the second day of the meeting to be after the election to avoid being seen as playing politics. Yes, the Fed is political. Are we surprised?

The Fed signalled QE2 back in August. With weak growth and low inflation, analysts started predicting the announcement of QE2 in September and it has been debated here in the US and abroad. (Japan announced some QE in September and the Bank of England is considering.)

The Fed delivered as expected yesterday. To have announced QE2 between meetings would have been interpreted as a panic move by the markets.

Whether it is right or wrong is another question.


rjs writes:

do you think anyone would have changed their vote if had come the day before?

no one was voting for the Fed, or paying any attention to what they were doing...

Pat writes:

Maybe the Fed thinks that banks might be more willing to lend excess reserves now that there is gridlock?

Or maybe they thought the people most concerned about inflation would be too busy celebrating their election victory to notice.

I'm not very confident in any opinion i have about the Fed though...

Karl Smith writes:

How about family #3

Fed calendar is set over a year in advance.

http://www.federalreserve.gov/monetarypolicy/fomccalendars.htm#9662

The policy consensus was reached over the summer as the Fed projections did not materialize and inflation expectations slide below 2%

http://www.bloomberg.com/apps/chart?h=200&w=280&range=1y&type=gp_line&cfg=BQuoteComp_10.xml&ticks=USGGBE10:IND&img=png

They debated at the September meeting and came to a tentative decision to roll it out at the next meeting, which happen to be the day after the election.

Jonathan writes:

rjs writes:

do you think anyone would have changed their vote if had come the day before?

no one was voting for the Fed, or paying any attention to what they were doing...

Yes, I think the senate would have gone to the Republicans if the announcement had been made pre-election.

I believe (operative term) that a plurality of voters were voicing outrage at what was perceived to be out-of-control spending by the federal government. Many of us know what quantitative easing is and its role in monetary policy. But to the casual observer (which is most of the country) 600 billion in bond purchases and a devaluation of the dollar at this moment must appear to be a frightening and irresponsible action taken by politicians and their appointees at a time when most people I know are reigning in their own spending and reducing their aggregate debt.


Daublin writes:

#2. One day is not long enough for a large change of mind.

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