The FOMC Minutes & QE3


  • The Wall Street Journal – Hilsenrath: Fed Moving Closer to Action
    The Federal Reserve sent its strongest signal yet that it is preparing new steps to bolster the economic recovery, saying measures would be needed fairly soon unless growth substantially and convincingly picks up. Minutes released Wednesday from the Fed’s July 31-Aug. 1 policy meeting suggested that a new round of bond buying, known as quantitative easing, was high on its list of options…”Many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery,” the minutes said. That language suggested the Fed has set a high bar for holding off. Few economists have described the economic improvements recorded since the meeting as substantial, and doubts remain about whether they are lasting. The Fed next meets on Sept. 12-13. The Fed’s worries about growth were echoed Wednesday by the nonpartisan Congressional Budget Office. It warned the economy likely would slide into “significant recession” next year if Congress doesn’t avert tax increases and spending cuts set to begin in January. Even if this “fiscal cliff” is averted, it added, the economy would probably grow less than 2% in 2013 with unemployment staying near 8%.
  • Reuters – Counterparties:  The CBO as Hilsenrath-like Fed whisperer
    This line, somewhat buried in the CBO’s latest report on economic and fiscal outlook, seems to think QE3 is a damn near certain:

CBO anticipates that the economic slowdown brought about by fiscal tightening, coupled with a lack of inflationary pressure, will prompt the Federal Reserve to embark on another round of large-scale asset purchases by early 2013, thus helping to hold down the rate on 10-year Treasury notes.

This little nugget beat the FOMC minutes, which set the stage for QE3, by a few hours. And was hours ahead of the WSJ Jon Hilsenrath’s story on same.  Which brings up some questions: It makes sense that the CBO would take possible — or even likely — Fed action into account, but how was the CBO so certain the Fed would act? Is this the first time the CBO has baked in a large-scale Fed action into its projections? How would a lack of Fed action affect the CBO’s outlook? And what should we make of the CBO footnote on this passage?

Because of the severity of the financial crisis and subsequent economic downturn, the Federal Reserve has used asset purchases and other nontraditional means to supplement its use of the federal funds rate to support economic activity. Between late 2008 and early 2010, for example, the Federal Reserve purchased about $1.25 trillion in mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae; $175 billion in debt securities issued by those agencies; and $300 billion in Treasury securities with maturities of more than one year. For a discussion of the nontraditional means and their effects on the economy, see Congressional Budget Office, The Budgetary Impact and Subsidy Costs of the Federal Reserve’s Actions During the Financial Crisis (May 2010); and Joseph Gagnon and others, Large-Scale Asset Purchases by the Federal Reserve: Did They Work? Staff Report 441 (Federal Reserve Bank of New York, March 2010),


The September 12/13 meeting is shaping up as the make-or-break moment for QE3.  At this meeting the FOMC members update their forecasts and Bernanke holds a press conference.  These events lend themselves well to policy changes (adding QE3), which is another reason many expect action at this meeting.  Additionally, the next meeting is not until late October and that is perceived to be too close to the election.
  • MarketBeat (WSJ Blog) – QE3′s Coming in September, No Doubt; Unless it Isn’t
    This tea-leaves stuff is hard! The markets have arranged the latest grouping of tea leaves, and concluded that September is it, definitely, without a doubt for more stimulus. Unless it isn’t. The latest FOMC minutes, relating what happened at the Fed’s July 31-Aug. 1 meeting, seem to point toward a new Fed bond-buying program coming in September, given that now “many” members are agitating for the Fed to “do something,” as opposed to “a few” at the previous meeting. Given the constrictions of the November election, and the current Fed’s desire to avoid any appearances of being politically motivated, the Sept. 12-13 meeting seems to be “it” if anything’s going to happen. “I stick to my belief that more QE is coming on Sept. 13 as the October meeting is too close to the election and Bernanke won’t act in December if Romney wins,” writes Peter Boockvar, managing director at Miller Tabak & Co. “This could be his last chance for a while and Ben still seems to believe in the pixie dust of QE.” But the Fed’s been hinting and hinting about a new stimulus program since QE2 ended last year; jawboning has become a real tool for the Fed. So, more hints don’t necessarily mean anything. Besides, the Fed’s hawks and doves are a pretty well-defined group. What matters is what Chairman Ben Bernanke thinks, and he’s been holding his cards very close to the vest.
  • Zero Hedge (Blog) – Bullard Says FOMC Minutes Are Stale
    Following yesterday’s FOMC minutes we suggested that the minutes are, all facts considered, extremely stale, especially when one actually observes the surge in all economic indicators (or should we say seasonal adjustments) since the last FOMC meeting. Moments ago, on CNBC, non-voting St Louis Fed president confirmed just that.
  • St. Louis Fed President Bullard says FOMC minutes “are a bit stale”.
  • Says some data stronger since FOMC minutes
  • Doesn’t know where FOMC will come out on easing
  • Says “different constellation” of data vs 2011
  • Says “not sure” data warrant big FOMC action
  • Says U.S. unemployment “very high”
  • Says “we’re not going to react” directly to stock market



Remember that this is arguably the most divided FOMC in the 100-year history of the Federal Reserve.  Simply put, the hawks (i.e., Richard Fisher and Charles Plosser) and the doves (Charlie Evans and Eric Rosengren) have radically different views of the economy and what the Federal Reserve should do.  The Federal Reserve has a median view with a very wide variance.

To be sure, Bernanke has the votes for QE3.  He has always had the votes.  But there is also a strong vocal minority against it.  He fears the hawks may hit the airwaves to tell the world the Federal Reserve made a mistake and undermine his policy.

Given this, view Bullard’s comments as personal opinion.




For more information on this institutional research, please contact:

Max Konzelman

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