10/14 Beckner: QE2 and Bernanke Friday Speech Expectations

Written on October 14, 2010

For you, my friends.

All the best,

Leon

+------------------------------------------------------------------------------+ Federal Reserve State of Play - By Steve Beckner - 13 Oct'10> 2010-10-13 15:52:36.866 GMT Wall Street expectations of renewed quantitative easing at the Nov. 2-3 Federal Open Market Committee meeting are now so strong that Fed watchers call it a foregone conclusion the FOMC dare not disappoint. Fed Chairman Ben Bernanke has a chance to confirm or dispel those expectations in a Friday speech at a Boston Fed conference. So far, while signals have been sent, they have been imprecise. And what has actually been said seemingly leaves the question slightly open. Bernanke, New York Fed President William Dudley and other officials have said "QE2" would be "effective" in lowering long-term interest rates and helping the economy. But they have not said the FOMC should definitely proceed Nov. 3. Dudley, for instance, has called Q.E. "likely" but said he wouldn't "prejudge" the Nov. 3 outcome. Boston Fed President Eric Rosengren told MNI he'll back more monetary stimulus if the economy doesn't improve but said he has "an open mind" about Nov. 3. Others, including current FOMC voters James Bullard and Sandra Pianalto of the St. Louis and Cleveland Feds, have shown some ambivalence about QE2, at least as to timing. Some adamantly oppose it. After its Sept. 21 meeting, the FOMC said it was "prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate." The meeting's minutes add little to understanding. "(S)ome members saw merit in accumulating further information before reaching a decision about providing additional monetary stimulus," they disclose. "In addition, members wanted to consider further the most effective framework for calibrating and communicating any additional steps to provide such stimulus. Several members noted that unless the pace of economic recovery strengthened or underlying inflation moved back toward a level consistent with the Committee's mandate, they would consider it appropriate to take action soon." In her first speech as vice chairman Monday, former San Francsico Fed President Janet Yellen cautiously avoided taking a position on QE2. But her comments about the Fed's ability and need to "lean against the wind" of asset price bubbles should they arise can be read -- and were read by many -- as facilitating more monetary accomodation now. Kansas City Fed President Thomas Hoenig was more vociferous than ever against QE2 Tuesday. He told the National Association for Business Economics pumping more money into the economy by buying bonds to depress long-term interest rates would have more costs than benefits. He questioned whether more Q.E. would cut already low rates much. And, even if it did, he said it would be unlikely to have much economic impact. He said there is already plenty of money in the economy, but firms are reluctant to hire and invest because of uncertainty over tax and regulatory policy. And he warned further money injections could lead to new asset price bubbles, resource "misallocations," "more imbalances," "more volatility," an "unanchoring" of inflation expectations leading to excessive inflation and a disruptive dollar drop. Notwithstanding such concerns, it does seem increasingly likely -- though not totally certain -- that the FOMC will act to "provide additional accommodation" Nov. 3 unless Bernanke decides soon to change market expectations. But the FOMC faces a contentious debate, a difficult task of deciding exactly how to implement QE2 and potentially negative repercussions both short-term and long-term, both domestically and internationally. -0- Oct/13/2010 15:52 GMT