QE2 Disappointment: QE2 has been implemented in such a way that there was no reason to expect a lot of traction on the economy; the only channel through which we might have had large effects was via expectations. And that part mainly happened before the policy actually began. What is the Fed actually doing? It... has been buying long term bonds, paying for them by adding to (interest-paying) bank reserves. In effect, it has been borrowing short and lending long.... But as [Jim] Hamilton points out, even as the Fed has been acting to reduce that maturity, the Treasury has been increasing the maturity of its borrowing, to such an extent as to swamp the Fed’s efforts. So we shouldn’t have expected much if any direct effect.... What QE2 might have done — and probably did do for a while — is act as a signal of the Fed’s determination to do whatever is necessary, and maybe of a willingness to accept higher inflation. But this only goes so far.... It’s also worth remembering that Joe Gagnon’s proposal called for a much bigger effort, as well as some more explicit efforts to change expectations (and notice that all I said was that it was worth trying, not that it would surely work). So what we’ve had is a much downsized version of the policy, more than offset by other government actions — a lot like the fiscal stimulus. And we’re supposed to be surprised that it proved disappointing?