Quantitative easing by the BoJ has amounted to 100 trillion yen, or 21% of GDP. •  The Bank of England is buying gilts, and some commercial paper and corporate bonds. Its Asset Purchase Programme is now £ billion, or 24% of GDP. 26. Central banks cannot expand their balance sheets indefinitely. The incremental benefits of further monetary easing are diminishing while the potential costs are increasing. 27. On the benefit side, it is not clear that additional monetary stimulus is an appropriate tool at this stage of the cycle. We would do well to remember the words of John Maynard Keynes in 1936, “If .... money is the drink which stimulates the system to activity, we must remind ourselves that there may be several slips between the cup and the lip.” 28. The problem is not liquidity but credit. Capital-strapped banks are unwilling to lend and the private sector is unwilling to borrow, a reflection of uncertainty over fiscal policies, high indebtedness, and low income growth. 29. And we should be vigilant of the potential costs of cheap money. As market stresses subside and money multipliers recover, the abundance of liquidity could fuel a strong monetary expansion with adverse consequences for prices, which would eventually require large hikes in interest rates to counter. Easy money over a prolonged period can also lead to a mispricing of risks and unsustainable asset prices, compromising both price stability and financial stability. 30.
The unemployment rate is 8-1/4 percent – well above the rate anyone on the FOMC sees as being consistent with our longer-run goal; in my view, this is a substantially higher rate than one might attribute to supply-side factors, such as extended unemployment insurance and a heightened degree of mismatch in labor markets. Realistically, this is a 2-1/4 to 3 percentage point deviation from our current maximum employment objective. Because this occurred with nominal interest rates stuck at the zero lower bound since December 2008, I believe it’s hard to say that we are not in a liquidity trap. Recently, the U.S. data have been more encouraging, with the labor market improving and private demand showing a little more traction. Without a doubt, these are welcome developments. But even the more optimistic forecasts see output increasing only moderately above its potential growth rates; no one has an expectation for a surge in activity that would quickly close resource gaps. At the same time, the outlook for inflation is subdued, with most FOMC participants’ forecasts for increases in total personal consumption expenditures prices averaging roughly between 1-1/2 and 2 percent over the next three years. Furthermore, private sector long-run inflation expectations are quite well anchored.