The broad scope and open-endednature of the Federal Reserve's third round of quantitative easing(QE3) raises questions about exactly what Fed Chairman Ben Bernankehas in mind. Some insight, remarkably, emerges from a speech hegave in November 2002, when he was simply a Fed board member, tothe National Economists Club in Washington. Taking his cue fromfears at the time about a Japanese-style deflation, Bernanke laidout a path for monetary stimulus in an extreme situation, outliningnon-traditional policy tools that have since become common. Thespeech also took comfort in the relative strengths of the U.S.economy compared with Japan's. Perhaps the dissipation of thoseadvantages contributed to Bernanke's decision to pursue QE3now.

The Fed chairman's 10-year-old talk offers a remarkableforecasting device. It explained how, in an extreme situation,traditional monetary policy tools, even bringing short-terminterest rates down to zero, might not produce enough stimulus, andit listed the “non-traditional” policies the Fed might employ: 1)purchasing longer-dated Treasury, agency, and mortgage-backedsecurities; 2) announcing an intention to keep short rates low foran extended period; and 3) injecting liquidity into financialmarkets by accepting corporate bonds, bank loans, commercial paperand mortgages, among other securities, as collateral for directlending to banks. All these tools made appearances during the2008-09 financial crisis and have lingered in its aftermath. Afourth technique Bernanke mentioned in 2002 involved purchasing thedebt of foreign governments. The Fed has yet to do so, but it mightif there is any further deterioration in Europe.

Behind all of these measures, Bernanke's talk pointed to thegrowth of money and liquidity as the ultimate policy objective toget the economy moving and, in the specific context of his talk, toavoid deflation. He even alluded to running the “printing press”and the “electronic equivalent” to force funds into the economy andfinancial markets. For a while in this more recent period, thatobjective seemed to elude the Fed. Banks failed to lend, and moneygrowth languished. But of late the chairman has gotten hislooked-for responses. Federal Reserve statistics show the narrow M1definition of money has grown at a robust rate of about 11% duringthe last 12 months and accelerated to about a 15.5% annual rate ofadvance over the past three months. The broader M2 definition ofmoney expanded at a strong 6.3% rate during the last 12 months andheld at a 6.5% annual rate of expansion over the last three months.Banks have begun to lend, too. Overall bank lending has expanded atan annual rate of about 3.5% during the past three months, with thecritical commercial and industrial component growing at a 13.7%annual rate.