New doubt has been cast on the effectiveness of the Federal Reserve's expected monetary expansion campaign that will probably be announced next week. This morning, the Wall Street Journal reported that a new asset buying program is likely to be small and slow. Investors weren't amused, as the news is blamed for most of the reason why the stock market is down more than 1% today. Is their response rational?
First, let's look at precisely what the Journal article said:
The central bank is likely to unveil a program of U.S. Treasury bond purchases worth a few hundred billion dollars over several months, a measured approach in contrast to purchases of nearly $2 trillion it unveiled during the financial crisis. The announcement is expected to be made at the conclusion of a two-day meeting of its policy-making committee next Wednesday.
That's obviously a little vague, but it sounds like we're talking between $250 and $500 billion to occur over three to six months. Why is the market unhappy with that?
In the economy's current condition, it's impossible to justify a massive $2 trillion asset purchase plan. When the financial crisis hit, such a program made sense for two reasons. First, the economy was on a very bad trajectory, as several quarters of steep drops in GDP were imminent. Second, the asset-backed bond market was frozen, so the Fed needed to purchase securities in order to provide banks with funding to continue to lend.