The major issue, [Mr. Bernanke] said, is “whether or not there is in fact a sustained recovery going on in the labor market, or are we stuck in the mud?” Mr. Bernanke added a wrinkle, saying the central bank “would certainly want to react against any increase in deflation risk.”
This was from Chairman Bernanke’s testimony last week to the Senate Banking Committee after the release of the FOMC minutes. The Chairman is clearly frustrated by the economy’s failure to respond to what he and most economists believe the correct policies.
The Fed’s most recent
Leakee oracle, Jon Hilsenrath, whom I am sure, must have the ear of Fed insiders, put out a piece today on “Fed Moves Closer to Action”. Like any institution, the Fed likes to see how the financial community might react to certain policy moves. Hilsenrath points to various policy alternatives that the Fed might try, including, using the discount window (not likely), extending Twist (why bother; how low must rates be?), charge interest on excess reserves (not likely-repo market impacts), push ZIRP even lower (again, why bother), extend ZIRP even further in time (again, why bother), and quantitative easing.
Two things stood out in the article that are worth repeating. The first is that James Bullard, an inflation hawk at the St. Louis Fed, was quoted as saying that ”he would be prepared to act if inflation falls too low or if a new shock hits the economy.” Price inflation is low, so that restriction on QE is absent.
The other thing was about the timing of QE. Hilsenrath says:
A new round of bond-buying would be politically controversial so close to the November presidential election. During Mr. Bernanke’s testimony last week, Democrats made clear they wanted the Fed to act and Republicans said it should proceed cautiously. The Fed chief has said repeatedly that the central bank will seek to do what is best for the economy, regardless of political pressure.
The next FOMC meeting at which a policy change could be adopted is on July 31 and August 1. After that they would have to wait for the September 12-13 meeting, or the October 23-24 meeting. I suggest that September and October are too close to the election to appear non-political. Yet the next meeting after the election is December 11-12 which may be seen as being too late to “save” the economy. What I am getting to is that the July 31 meeting date is the optimal date for the Fed to take action without being seen as being (too) “political”.
This is pure speculation on my part, and I wouldn’t bet the farm on it, but it will be interesting to see what and when they will do “something”. As you know I think it will be QE.