The FOMC Playbook Has Not Changed

Last week when I wrote ahead of Bernankes Jackson Hole speech, I stated that I thought that not much would come of it in the way of an explicit QE3 announcement. I was expecting to hear “language to the effect of ‘should things deteriorate further and the overall price level drop we can do X.’ ” From the speech:

In addition to refining our forward guidance, the Federal Reserve has a range of tools that could be used to provide additional monetary stimulus. We discussed the relative merits and costs of such tools at our August meeting. We will continue to consider those and other pertinent issues, including of course economic and financial developments, at our meeting in September, which has been scheduled for two days (the 20th and the 21st) instead of one to allow a fuller discussion. The Committee will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools as appropriate to promote a stronger economic recovery in a context of price stability.

While he gave no specifics of what might be done, that was a pretty clear indication that they were keeping an eye on things and would act should conditions warrant in their eyes.  

Since that speech, we’ve had the release of the FOMC minutes and various Central Bankers around the world have commented on the state of affairs. The most interesting part was this excerpt:

In the discussion of monetary policy for the period ahead, most members agreed that the economic outlook had deteriorated by enough to warrant a Committee response at this meeting. While all felt that monetary policy could not completely address the various strains on the economy, most members thought that it could contribute importantly to better outcomes in terms of the Committee’s dual mandate of maximum employment and price stability. In particular, some members expressed the view that additional accommodation was warranted because they expected the unemployment rate to remain well above, and inflation to be at or below, levels consistent with the Committee’s mandate. 

This backs up my assertion that more easing is on the way, and it’s just a matter of time. Most of the Committee would have supported an explicit easing program, but the dissenters (of which there happened to be 3) prevented it. Instead they ‘settled’ for less vague language in defining the length of time they would remain accommodative with respect to the Funds rate, instead of the usual ‘extended period.’

The bold sentence highlights how out of touch the Fed really is. The sentence reads as though through printing money and goosing asset prices, unemployment can be reduced. This is ridiculous given the fact that the Federal Reserve has engaged in unprecedented action since 2008 has not budged the unemployment needle, and has made things worse by some measures. With respect to inflation, at 3.6% year over year inflation by official measures, one can hardly suggest that inflation is to remain at low levels when advocating the contiuation the drivers of those price increases (currency devaluation via  accommodation).

That doesn’t seem to bother the Central Bankers though. Dennis Lockhart, and Naranya Kocherlakota seem to be ok with the current stance of the Fed, yet both have said they’ll move to ease further if things go awry Charles Evans, and Bank of England member Adam Posen believe that we should already be doing stimulus now and  we shouldn’t waste anymore time in hitting  Ctrl-P. Regardless, markets should be aware of the fact that Central Banks will ease again, regardless of the consequences, and regardless of the diminishing returns of each additional effort.


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