Federal Reserve officials are seriously considering giving the US economy—and especially the housing market—an added jolt with more quantitative easing.
Fed officials are likely to discuss such a move at their Jan. 24-25 meeting, when the central bank will issue its first quarterly forecast on interest rates under the new communication policy.
Two of the new voting members this year on the Federal Open Market Committee , which sets interest-rate policy, have recently suggested they would support more assets purchases.
San Francisco Fed President John Williams said that sustained high levels of unemployment, as forecast by many Fed members, “does make an argument that we should have more stimulus.”
Another new voter, Cleveland Fed President Sandra Pianalto, said in a recent speech that economic models indicate the Fed “should be even more accommodative than it is today.”
They join other members, including New York Fed President Bill Dudley and several Fed governors, who have openly suggested they would support more QE .
As part of an normal rotation of presidents, the makeup of the FOMC will become more dovish this year.
Three hawkish members are losing their FOMC vote—Richard Fisher of Dallas, Narayana Kocherlakota of Minneapolis and Charles Plosser of Philadelphia—along with only one dovish member, Charles Evans of Chicago.
They will be replaced by two more dovish members—Williams and Pianalto—and Dennis Lockhart of Atlanta, who is moderate but is seen as unlikely to dissent.
But a more dovish makeup is just one reason that more QE could become a reality this year.
Fed officials harbor doubts about the strength of the economic recovery and note there is considerable slack. And they expect inflation to remain moderate this year.
It is also significant that financial markets expects the Fed to act.
The newly released primary dealer survey from the Fed shows that top Wall Street fixed income dealers put a 60% probability on the Fed boosting the size of its balance sheet within a year.
Much will depend on the economic data during the first quarter. One concern inside the Fed is that much of the recent economic strength results from one-time factors, such as rebuilding inventories.
Taking out inventories, underlying GDP still looks weak to some Fed officials. Meanwhile, income growth has also been lagging, suggesting any spending gains from the holiday season likely came from savings. Fed officials generally see this as unsustainable.
The most likely course for the Fed is to gauge what kind of effect its latest innovation—publishing the expected interest rate path from its members—will have on bond yields.
There is hope that if the path shows that Fed officials put the date of the first rate increase further down the road than the market expects, that could edge down long-term rates.
But the minutes of the December meeting also showed that for “a number” of officials, this new communications strategy is not a replacement for more easing, but rather, a precondition.
Already some Wall Street banks are building QE3 into their forecasts. Morgan Stanley fixed income economist David Greenlaw said he expects more easing to be announced this spring.
I believe that it would be a accurate statement that the psychos are running the nut house. I wrote that once, it is still true. I should also point out, that doing this to our money supply does nothing to stimulate economic growth at all. If anything, it causes inflation of the money supply, which drives the cost of everything up, which kills jobs growth; because if you are a business and you are having to pay more for everything, you are going to be less likely to hire people to work for you. But with Liberals, it is like talking to a tree; this is normal for them.
