UPDATED (10:45, July 12th)
QE3 here we come, perhaps.
Last month, when Federal Reserve chairman Ben Bernanke did his second press conference following a meeting of the U.S. central bank’s policy makers’ committee, he seemed to suggest that the Fed was unlikely to launch a new round of its controversial bond buying program. The second round of the program, which was launched late last year, and is dubbed QE2 was supposed to boost the economy by bringing down long-term bond rates, but some have questioned how effective the program was.
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Nonetheless, it appears the Fed’s stimulus efforts may be around for longer than earlier thought. On Wednesday, Bernanke, testifying in front of House of Representative committee, told members of Congress that the U.S. central bank plans to maintain the size of its bond portfolio for the time being. Some had suspected the Fed would gradually shrink the portfolio as the bonds it holds matures. Instead, Bernanke hinted that he plans to reinvest those funds in order to maintain low interest rates. Bernanke said the Fed won’t start selling off its bond portfolio until after it raises short-term interest rates, which many don’t believe will happen until sometime next year. While Bernanke said he thought QE2 was a success in lowering interest rates and decreasing the chance of deflation, he said the Fed has no plans to launch a new round of the stimulus program.
But QE3 may have more of a chance of happening than Bernanke is letting on. On Tuesday, the Federal Reserve released its notes from the June meeting and it appears there were policy makers who are pushing for another round of the controversial program. And remember this meeting happened in mid-June, before the announcement of the most recent ridiculously bad jobs reports. I think the Fed will eventually add more stimulus to the economy. Here’s why:
Fed meeting minutes are always a little cryptic. The minutes say “some participants” said that if unemployment remained high and inflation remained low then they thought it would make sense for the Fed to “provide additional monetary policy accommodation,” which is Fed speak for try it should try to juice the market. And with short-term interest rates already at nearly zero, the only way for the Fed to do that would be through another round of bond buying.
To be sure, the Fed is still a long way from pulling the trigger on QE3. There is no way to tell from the notes how many people were for initiating a new round of bond buying. And it is clear that there were some Fed board members who were against the move. Some said they thought the problem with the economy was not interest rates, but a disconnect between those who are out of work and the jobs that need to be filled. Some even said that they thought the Fed needed to start selling its bonds, not start a new program.
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But if you read the all of Fed’s meeting minutes there are a number of disturbing signs for the economy. One Fed board member reported that businesses in their district had put hiring on hold until there was more certainty in the direction of the economy. Other members reported that the banks in their area were more willing to lend, but that demand for loans was dropping. Remember we are coming out of a recession. So demand wasn’t so great to begin with.
To me, all this adds up to a need for more stimulus. And while there was certainly some question as to how much affect QE2 had on the economy, I think it is hard to say that QE2 hurt the economy. So I don’t see the downside of QE3. Higher inflation, perhaps. But that could be a good thing as well, as long as it is in moderation. And with Washington looking like it can’t agree on something, I think the Fed will eventually try the only move its got left in its playbook to boost the economy, even board members are not quite there yet in pulling the trigger.