Jim Jubak
Virtually unnoticed amid the Sturm und Drang last week from Europe, on Nov. 2, the U.S. Federal Reserve inched closer to a new round of quantitative easing.
The likely shape of such an economic stimulus effort would reflect the Fed's fears that U.S. economic growth is still much too weak and fragile, that the big problem is a lack of any real recovery in the housing market, and that its "Operation Twist" has failed to significantly lower mortgage rates.
What would move the Fed to actually pull the trigger on a program that would result in a political firestorm? (Remember, Republican presidential contender Rick Perry has already said he'd regard Fed Chairman Ben Bernanke as a traitor if the Fed tried to increase U.S. economic growth ahead of the 2012 presidential election.)
Two things, I think:
- Signs that the U.S. Congress will not only let the 2010 lame duck stimulus expire in December but also either do something that would endanger the nation's AA credit rating or move to reduce near-term government spending, applying the brakes to an economy that's barely moving ahead as it is.
- Signs that the euro debt crisis -- and the "solutions" to it -- are likely to let loose another round of global deleveraging like we had after the Lehman Brothers bankruptcy in 2008.
The Fed is likely to get confirmation of its worst fears on both of those fronts over the next two to six weeks.
A third round of quantitative easing would by no means be as powerful a force in the markets as QE1 or QE2, but it would definitely push the U.S. dollar lower, increase fears of inflation, prop up commodity prices and revive the gold market. What it would do for stock prices is less clear, although a replay of the rally that followed the announcement of QE2 is a strong possibility.
The Fed is getting worried
Last week's meeting of the Fed's Open Market Committee ended the way that the meetings of this interest-rate-setting body always do -- with a statement to the media. Last week's statement was cryptic (as these statements always are), and you had to study the wording carefully to see that the Fed was even contemplating any change in policy.
But there it was.
In September, the committee said that it had "discussed the range of policy tools available to promote a stronger economic recovery in the context of price stability."
Last week, the committee said that it was "prepared to employ its tools to promote a stronger economic recovery in the context of price stability."
Significantly, there was only one negative vote at this meeting, and it came from Chicago Fed chief Charles Evans, who wanted the Fed to do more to bolster the economy. After the Sept. 21 meeting, the committee registered three negative votes on a much weaker statement on the need to act to increase economic growth. And those came from three other Fed presidents, Richard Fisher, Charles Plosser and Narayana Kocherlakota, who have been strong advocates of the Fed doing less. In other words, in the course of a month, the votes on the Open Market Committee have swung decisively in favor of more, rather than less, intervention.
Why? Let's start again with the committee's statement.
"Information received since the Federal Open Market Committee met in September indicates that economic growth strengthened somewhat in the third quarter . . . . Nonetheless, recent indicators point to continuing weakness in overall labor market conditions, and the unemployment rate remains elevated . . . . The Committee continues to expect a moderate pace of economic growth over coming quarters and consequently anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Moreover, there are significant downside risks to the economic outlook, including strains in global financial markets."
So this is what the Fed sees for the economy -- slow growth, with unemployment staying elevated for far longer than in a typical recovery from recession. And with the risks all to the downside.
