patrick.net

I think the author of that NY Times article doesn't understand what really limits the Fed from printing more: the bond market will demand higher interest rates there is more inflation.

Higher interest rates will reduce house prices and bank collateral, leading to more bailouts, higher unemployment, and a slower economy.

There really isn't much that the Fed can do about that.

the bond market will demand higher interest rates there is more inflation.

Patrick - inflation cannot occur when wages are stagnant. QE is not an effective transmission mechanism, but that's all we have with a Congress in complete grid-lock. QE does not increase wages, which is when you can really have core inflation (the inflation that the Fed is looking at when conducting monetary policies).

Source: http://bpp.mit.edu/usa/

So yeah, bond market interest rates cannot rise without real core inflation - therefore yields will remain depressed for the foreseeable future. But yields are depressed so low that depressing them further is not going to do anything meaningful in the real economy.

QE has a lot of negative long-term effects too, and the Fed is aware of it.

See this: http://nonlineardynamic.blogspot.com/2012/08/unintended-consequences.html

Higher interest rates will reduce house prices and bank collateral, leading to more bailouts, higher unemployment, and a slower economy.

Because there won't be higher interest rates any time soon, house prices will remain in a sort of stasis, they'll stagnate. May be they will dip further but I cannot see them dipping by a huge amount, unless we have catastrophic deflation -- which the Fed won't allow.

Unemployment remains very high and the economic recovery is anemic. This is not going to change anytime soon.

uomo_senza_nome says

Patrick - inflation cannot occur when wages are stagnant.

I agree inflation is unlikely with our current unemployment rate, because those people can't buy anything, but it could occur if the Fed simply started dropping money from the helicopters.

but it could occur if the Fed simply started dropping money from the helicopters.

Which they won't. Ben talked about it, but I don't think they'll actually do that. The reason is because there are more people than Ben that actually make the final decision and there are hawks in the FOMC.

What could happen are the following, but these need political will.

1. Debt jubilee
2. Infrastructure projects
3. Tax holidays

These won't happen until the election is over. The job market could get much worse by then, which will push the political levers.