Today's daily economic report from Goldman Sachs performs a fascinating exercise: It tries to measure the power of the Fed's so-called "unconventional easing."
To review: The Fed normally stimulates the economy by lowering short-term interest rates. (Actually, by lowering its "target" for short-term rates, but let's not complicate this.) But, in December, the Fed basically lowered short-term rates as far as they'll go--i.e., zero--and so there's no more juice to squeeze there. (Nominal interest rates, that is. But, again, not worth getting into...)
The big remaining option is what's known as unconventional easing, wherein the Fed tries to inject more "liquidity" into the economy (i.e., lower the price and increase the availability of credit) by buying up various assets--like corporate debt, consumer loans, mortgage-backed securities, or all of the above and more.
So what Goldman tried to figure out is how much in the way of assets you'd have to buy up to replicate the effect of, say, another 1 percentage point drop in interest rates. Their answer: about $1 trillion to $1.6 trillion.
Now that sounds like a lot. And Goldman certainly thinks it is. They write: "These are clearly huge numbers, especially when compared with the Fed’s current balance sheet ($1.9 trillion, of which securities [asset purchases like the kind we're talking about] held outright make up roughly one-third)." But I actually take this as encouraging news. As it stands, it sounds like the Fed is planning up to $1.6 trillion in asset purchases in the near future (sounds like within the next year, maybe six months, but the timing is vague). So, if Goldman is right, that would give us at least a one percentage-point rate cut pretty soon.
Anyway, for what it's worth...
Update: Krugman makes a compelling case for why this is not, in fact, encouraging. I am now discouraged...