Continuing our macro tour of the Dow Jones blog empire Real Time Economics expands on a point made by "The Source" blog in "Say Goodbye to Euro Rally" (EUR/USD):
...In the first place there is the dollar. The Fed may well still need to ease policy, but the rate of easing–that is, the size of quantitative easing–is likely to prove much less than expected when the Fed finally unveils its plans next week. If so, this could trigger a massive unwinding of dollar short positions that have built up in recent months and knock the euro back down again quite sharply....Here's RTE:
The Federal Reserve is likely to announce a new bond-buying program next week structured around smaller purchases that can be adjusted over time, rather than the shock-and-awe approach it employed in 2009. It’s a cautious strategy that considers the uncertainty around both the pace of the recovery and the costs of embarking on another round of purchases.
To help understand the latest approach inside the Fed, you can look to economist William Brainard, circa 1967, as explained by Ben Bernanke, circa 2004, in yet another speech from the Fed chairman’s early days at the central bank that’s providing useful guidance today.
In remarks simply titled “Gradualism,” then-Governor Bernanke explained the case for policymakers “to move slowly and cautiously” when they can’t be sure about the consequences. He cited a classic 1967 article by Brainard, a Yale economist, who “showed that when policymakers are unsure of the impact that their policy actions will have on the economy, it may be appropriate for them to adjust policy more cautiously and in smaller steps than they would if they had precise knowledge of the effects of their actions.”
Then he gets into miniature golf:
“Imagine that you are playing in a miniature golf tournament and are leading on the final hole. You expect to win the tournament so long as you can finish the hole in a moderate number of strokes. However, for reasons I won’t try to explain, you find yourself playing with an unfamiliar putter and hence are uncertain about how far a stroke of given force will send the ball. How should you play to maximize your chances of winning the tournament?...MORE