The Fed has gone "all-out" but markets remain doubtful. The decision to link the degree of monetary stimulus directly to the key measure of capacity utilisation (unemployment) is as aggressive as we have ever seen from the Fed. History shows that it has always been wrong to "fight the Fed" once it has decided to use whatever monetary stimulus is necessary to rectify a below capacity economy. Yet consensus expectations for US growth remaining at or below potential, alongside pervasive doubts about the efficacy of QE, indicate that the equity market is doubting the Fed's ability to succeed this time. On the one hand there are worries that efforts to create "artificially" low interest rates will lead to an inflation shock. On the other hand there are worries that in a "zero bound" deflationary world, the Fed has run out of "ammunition" and is therefore "pushing on a string", with QE only providing a temporary boost to asset prices and failing to stimulate the economy. So the question as to whether QE works has now become of paramount importance in considering the outlook for equity markets.

Interest rates are not artificially low, they are naturally low and the very depressed level of bond yields in most of the major economies reflects market forces more so than central bank buying (Chart 1). Notions of "financial repression" and the inflationary consequences of an unusually low real Fed funds rate look to be well overdone. The Fed?s job is not to pick an interest rate out of the air or to rob savers of a "fair return" but rather to set its official interest rate at the level that reflects the natural clearing rate that equilibrates desired savings and desired investment in the economy at any particular point in time, thus promoting full employment and price stability. In an environment where structural factors had already been dictating an unusually low clearing level for global interest rates, it makes sense to believe that the additional downward cyclical pressure on rates in the aftermath of one of the biggest ever economic downturns could justify a real Fed funds rate well into negative territory. Failure to deliver an appropriately low rate would amount to deflationary policy error and inflationary policy error would only occur if the real rate is kept inappropriately low as the economy moves back towards a more normal level of unemployment.

David Fuller's view I have not seen a better defence of Fed policy. My main comments on this subject are in response to Email 1 above.