QE3 Is Here!

Last week, we were wondering what could be done next to encourage economic recovery. Now, we're seeing a curveball being thrown by The Federal Reserve. And believe it or not, this is a very good thing.

Let me... No, I'll let Ezra Klein explain.

It’s a big deal because of what they’re doing. They’re buying $85 billion in assets every month through the end of the year, and then they’re potentially going to keep doing it in 2013. They’re promising to keep interest rates low through the recovery, and then keep them low after the recovery strengthens.

But it’s a bigger deal because of what they’re saying. Thursday, the Federal Reserve said, finally, that they’re not content with 8 percent unemployment and a sluggish recovery, and they’re willing to actually do something about it. If you’re an investor or a business owner trying to decide what the market is going to look like next year, you just got a lot more optimistic.

That’s the weird thing about the Federal Reserve. We don’t just care about what they do. Because their power is so vast —the ability to make as much real, American money as you want is quite a superpower — we care about what they want in the future. And, until Thursday, we weren’t getting much clarity on what they wanted in the future, or how far they were willing to go to achieve it.

Before we get too excited about this Fed announcement, let's keep something in mind. As Kevin Drum reminded us, monetary policy takes a while to take effect. And while the size of this move looks big, we'll have to wait and see how much impact we'll ultimately see in 2013.

So we shouldn't set expectations too high. However, this is nonetheless a much welcomed move from the Fed. Even if QE3 itself won't take effect until December at the earliest, it may actually help the economy now just by reassuring investors and consumers that help is on the way. After all, when we feel good, we do good.