Monday, 27 August 2012

Fed Comments - Likelihood of QE3

Everyone is currently anticipating a few important policy speeches scheduled over the next few weeks. First up on the line is Bernanke's Jackson Hole speech which kicked off QE2 what seemed like an eternity ago.  Calculated Risk notes a few key comments here and even more here from Fed members to gauge their likelihood of embracing QE3.

From Cleveland Fed Pianalto:

I am expecting the U.S. economy to continue to grow, but at a moderate pace. I expect economic growth of about 2 percent this year. And with this moderate GDP growth forecast, my outlook is for very slow improvement in the jobless rate. I expect the pace of GDP growth to pick up gradually through 2014, and for the unemployment rate to remain above 7 percent through 2014. Given my outlook for slow economic growth, I also expect slow wage growth, and I anticipate that core inflation will remain near the FOMC's 2 percent long-term objective over the next few years. While inflation remains close to our objective, unemployment is still well above the FOMC's estimate of the longer-term normal rate. The monetary policy debate is whether the FOMC should take further actions to stimulate today's slow-growth economy to bring down unemployment.
Monetary policy should do what it can to support the recovery, but there are limits to what monetary policy can accomplish. Monetary policy cannot directly control the unemployment rate. It can only foster conditions in financial markets that are conducive to growth and a lower unemployment rate. At times, significant obstacles can get in the way.
The bottom line is this: I am supportive of actions that provide economic benefits with manageable risks. The FOMC's policy actions to date have been important economic stabilizers and have acted to support the expansion. Yet today, we still find ourselves in a challenging economic environment – one in which we continue to rely on nontraditional policy tools. These new tools come with benefits and with risks ... and we must constantly weigh both in our efforts to meet our dual mandate of maximum employment and stable prices.

From  Chicago Fed Evans:

Finding a way to deliver more accommodation — whether it is monetary or fiscal — is particularly important now because delays in reducing unemployment are costly. An unusually large percentage of the unemployed have been without work for quite an extended period of time; their skills can become less current or even deteriorate, leaving affected workers with permanent scars on their lifetime earnings. And any resulting lower aggregate productivity also weighs on potential output, wages and profits for the economy as a whole. The damage intensifies the longer that unemployment remains high. 
Failure to act aggressively now could lower the capacity of the economy for many years to come.... I have outlined some policy actions that I think can take us in the direction of a more vibrant and resilient economy. Given the risks we face, I think it is vital that we make such moves today. I don’t think we should be in a mode where we are waiting to see what the next few data releases bring. We are well past the threshold for additional action; we should take that action now
As suggested recently by my colleagues Eric Rosengren and John Williams, these could be open-ended purchases, meaning that they would continue at a certain rate until there was clear evidence of improvement in economic conditions.

Note that Evans is a non-voting member of FOMC so while his views are important, they are somewhat limited in influence.  Whats more surprising in the relative lack of Fed Hawks in the news, indicating either the majority is larger than thought or that there is some consensus on what directions the Fed is leaning on.

Another interesting note is how the previous QE1/QE2/Twist all came on the back on substantial drops in the stock market.  If QE3 is announced at the Sept talk, then it'll be coming on the back of basically the highest the stock market has been since the beginning of the crisis.  As note in some locations, the Nasdaq is now at its highest in 11 years and the S&P500 is only 10% from its 2007 high but 110% from its 2009 low.  Arguably the stock market performance is not a factor in this decision.

No comments:

Post a Comment