do something, anything ” to get the economy back to full employment. and for many, including many economists, this means having the federal reserve maintain its zero interest rate policy or further still, engage in a second round of quantitative easing – now called qe2. some are even suggesting these actions are necessary for the federal reserve to comply with its statutory mandate. interpreting the policy mandate the fomc ’ s policy mandate is defined in the federal reserve act, which requires that : “ the board of governors of the federal reserve system and the federal open market committee shall maintain long - run growth of the monetary and credit aggregates commensurate with the economy ’ s long - run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate longterm interest rates ”. there is, within the act, a clear recognition that our policy goals are long - run in nature. in this way, the act recognizes that monetary policy works with long and variable lags. thus, the fomc should focus on fostering maximum employment and stable prices in the timeframe that monetary policy can legitimately affect – the future. the fomc must be mindful of this fact and be cautious in pursuing elusive short - term goals that have unintended and sometimes disruptive effects. in recent weeks, some have argued that with inflation low and the jobless rate high, the federal reserve should provide additional accommodation. such an action – the purchase of assets by the central bank as a policy easing tool – would mark a second round of quantitative easing. while there are several ways to accomplish this, many suggest that the most likely method would be for the federal reserve to purchase additional long - term securities, including u. s. treasuries. proponents of qe2 argue that it would provide a near - term boost to the economy by lowering long - term interest rates while raising inflation. these benefits would arise from the purchase of u. s. treasury securities, which would lead to lower u. s. treasury and corporate rates. these lower interest rates would then stimulate consumer and business demand in several ways, including encouraging mortgage refinancing that could lead to increased consumer spending, boosting exports through a likely lower exchange rate, and fostering higher equity prices, thereby creating additional wealth. such a move is said to be consistent with the fomc ’ s september 21, 2010 announcement, which stated that it was “ prepared to provide

deleveraging that is hopefully winding down. if the purported benefits are small, what are the possible costs? first, without clear terms and goals, quantitative easing becomes an open - ended commitment that leads to maintaining the funds rate too low and the federal reserve ’ s balance sheet too large. the result is a further misallocation of resources, more imbalances and more volatility. there is no working framework that defines how a quantitative easing program would be managed. how long would the program continue, and what would be the ultimate size? would purchases of long - term assets continue until the unemployment rate is 9 percent or 8 percent or even less? would purchases continue until inflation rises to 2 percent or 3 percent or more? would the program aim to reduce the 10 - year treasury rate to 2¼ percent or 2 percent or even less? without answers to these and other questions, qe2 becomes an open - ended policy that introduces additional uncertainty into markets with few offsetting benefits. as central bank assets expand under quantitative easing, what will be the exit strategy? in the midst of a financial crisis, we may not have the luxury of thinking about the exit strategy. in current circumstances, however, we must define an exit strategy if the objective is to raise inflation but contain interest rate expectations. if history is any indication, without an exit strategy the natural tendency will be to maintain an accommodative policy for too long. while i agree that the tools are available to reduce excess reserves when that becomes appropriate, i do not believe that the federal reserve, or anyone else, has the foresight to do it at the right time or right speed. it may work in theory. in practice, however, the federal reserve doesn ’ t have a good track record of withdrawing policy accommodation in a timely manner. second, we risk undermining federal reserve independence. qe2 actions approach fiscal policy actions. purchasing private assets or long - term treasury securities shifts risk from investors to the federal reserve and, ultimately, to u. s. taxpayers. it also encourages greater attempts to influence what assets the federal reserve purchases. when the federal reserve buys long - term securities – such as the $ 1. 2 trillion in mortgage backed securities it purchased during the financial crisis – it favors some segments of the market over others. and when the federal reserve is a ready buyer of government debt, it becomes a convenient source of cash for fiscal programs. during a crisis this may be justified, but as