November 1, 2012
There’s already talk on Wall Street about the possibility of the Federal Reserve providing further monetary accommodation in response to the damage wrought by Sandy.
With the Fed Funds target rate at zero, this could mean larger quantitative easing asset purchases or a focus on buying different financial assets by the Fed.
One trader even described what he thinks the Fed will do as “QE Sandy.”
If history and economic theory are guides to Fed policy, however, those counting on further accommodation may be in for a shock. It’s very possible—even likely—that Sandy will mean Fed policy might be tighter than it might have otherwise been. And that’s because Sandy’s side-effects might well accomplish the very things that Ben Bernanke has been hoping that his quantitative easing policy would.