If the Federal Reserve begins another round of asset purchases in November, as widely expected, how much money should it print? Is $100 billion enough? Is $1 trillion too much? Considering that the U.S. is in a time of great economic uncertainty, it's very hard to tell what the right size would be. For that reason, the more flexibility the Fed has, the better. That's why an open-ended purchase plan makes so much sense.
Federal Reserve Bank of St. Louis President James Bullard suggested such a plan on Thursday. Matthew Brown and Wes Goodman of Bloomberg report on his proposal:
"If we do decide to go ahead with quantitative easing, I think there is a good program we could adopt, one I like, which is to think in units of $100 billion between meetings" of the Federal Open Market Committee, Bullard said at a conference hosted by the district bank. "We could give forward guidance for the next meeting that would suggest how likely the committee thinks we would continue these purchases."
Let's start with the criticisms of such a plan compared to one where some large sum is instead announced for purchases to take place over some time period. There are two that stand out.
The first is that the market might not like it. Investors and traders instead may prefer more certainty about how money supply the Fed will add to the financial system. But according to that same Bloomberg article, the Treasury market responded positively when it got wind of Bullard's plan, rallying to a weekly gain. So the market's reaction to an open-ended plan might not be an issue.