BEFORE the Fed's statement on Wednesday markets appeared to believe that some reduction in the pace of asset purchases was in order, mostly likely of around $10 billion. As it turned out the Fed was not ready to start "tapering", and some reckon that reductions may not come until December or January.

Now if you think that the Fed has merely delayed the start of tapering by a few months, then you might conclude that Wednesday's decision implies an increase in the expected size of the Fed's balance sheet of perhaps $30 billion. That's less than 1% of the size of the Fed's balance sheet.

Felix Salmon considers this and concludes that the multiplier on QE is much larger than many people imagined, given the big moves in markets that followed the Fed meeting:

[H]ow much did the value of US fixed-income assets rise on Thursday? And, for that matter, how much did the value of US stocks rise on Thursday? I don’t know the exact answers to the questions, but I’m pretty sure that the latter numbers are much larger than the former — that the market reaction, in dollar terms, was hugely greater than the extra amount of QE that the market now expects. If that is indeed the case, then what we’re seeing is what you might call the QE multiplier — the amount by which every dollar of QE effects the markets as a whole. I don’t know what we thought the QE multiplier was on Wednesday, but in light of Thursday’s market action we might need to revise our guesses: the QE multiplier is, I suspect, much larger than most of us would have pegged it at.

Mr Salmon reckons that's a good thing. Tyler Cowen and Kevin Drum think it's bad, though I'm not particularly clear on why. I think it's probably wrong.

There are three ways to read the market reaction. One is the one that Mr Salmon puts forward, which looks to me the least compelling of the three. Another option, which makes a bit more sense, is that the market reaction was more or less in line with what we'd expect. If you read the decision as a sign that the Fed isn't merely delaying tapering but will also stretch out the process of curtailing purchases then you might think the Fed's expected balance sheet grew on Wednesday by several hundred billion dollars. Surveys of QE studies reckon a reasonable rule of thumb is that $600 billion in purchases brings down long-rates by about 15-20 basis points. On Wednesday the 10-year Treasury dropped by 17 basis points. Meanwhile, equities were up a bit over 1% on the statement and market expectations of inflation five years ahead rose about 6 basis points. That's a hefty move for a $30 billion shock, but not for something ten times larger.

The third story one might tell, and the one that's closest to the truth in my estimation, is that the news of no change in asset purchases in September was one very minor part in a suite of communcations. When taper talk ramped up in May and June and markets swung on the news, they weren't reacting solely to expected changes in the Fed's balance sheet, but to what the Fed was signalling about its views on the appropriate pace of recovery for the economy. Now as it turned out markets over-interpreted the Fed's talk. And so the Fed found itself needing to adjust market perceptions. The no-taper call was one aspect of that. So were remarks about the importance of the 7% threshold for ending QE (virtually none, it now seems) and the 6.5% threshold for raising interest rates (almost none, so long as inflation doesn't stray too far above target). So, for that matter, were comments about the labour-force participation rate.

We see evidence for this in shifts in federal funds futures contracts, which signal more confidence that rates will stay low for some time. And the upshot is that Fed tightening will proceed alongside a higher rate of inflation and a lower rate of unemployment than markets had previously anticipated.

That's actually quite important. A lower path for unemployment implies less long-term joblessness and a higher rate of potential growth. And a higher path for inflation implies reduced odds of hitting the zero lower bound in future recessions and absorbing all the economic costs that entails. Taken together, cumulating the effects over a long period at reasonable discount rates, that's actually a really huge deal.

Huge enough that one might wonder why there wasn't more of a market reaction than we observed. Honestly, Ben Bernanke can move equities 1% with an unexpected sneeze. Why then didn't these communications deliver more of a bang? The proper question isn't why the QE multiplier is so big but why it is so small.

The answer to that would seem to be that the Fed is a very slow learner when it comes to using expectations effectively. It has yet to realise that keeping the mechanical aspects of policy constant while warning about the gauntlet of threats confronting the economy is contractionary on net. It has yet to understand that communicating the outcomes you are willing to tolerate is very different from communicating the outcomes you want and are willing to work for using the tools available. The Fed's problem is that it is getting remarkably little bang for its balance sheet buck. And the risk is that it will then conclude that balance-sheet policy has an unattractive risk/reward ratio and will holster a useful part of the toolkit while the economy remains short of demand.

If the Fed doesn't like using QE and wants to stop as soon as possible, it needs to maximise the return to asset purchases. And the way to do that is to set a very specific goal—achievement of full employment within two years, with a healthy dose of catch-up growth in nominal incomes to accompany—and clarify that QE will be marshalled solely to achieve that goal, and will be scaled up if necessary if the economy falls behind schedule. Do that, and then we'll see about big QE multipliers.