FOMC Members
Ben Bernanke
William Dudley, NY, Vice Chairman
James Bullard, St. Louis
Elizabeth Duke, BoG
Thomas Hoenig, Kansas City
Sandra Pianalto, Cleveland
Sarah Raskin, BoG
Eric Rosengren, Boston
Daniel K. Tarullo, BoG
Kevin M. Warsh, BoG
Janet L. Yellen, BoG
Alternate Members
Charles Evans, Chicago
Richard Fisher, Dallas
Narayana Kocherlakota, Minneapolis
Charles Plosser, Philadelphia
Christine Cumming, New York
Fed Opinions on QE2:
In Favor:
William Dudley: "Currently, my assessment is that both the current levels of unemployment and inflation and the timeframe over which they are likely to return to levels consistent with our mandate are unacceptable. In addition, the longer this situation prevails and the U.S. economy is stuck with the current level of slack and disinflationary pressure, the greater the likelihood that a further shock could push us still further from our dual mandate objectives and closer to outright deflation.
We have tools that can provide additional stimulus at costs that do not appear to be prohibitive. Thus, I conclude that further action is likely to be warranted unless the economic outlook evolves in a way that makes me more confident that we will see better outcomes for both employment and inflation before too long."
Charles Evans (Non-Voter, But will be a voter in 2011): "The unemployment rate is very high. Inflation is low. To me that means we need an accommodative stance of monetary policy."
"We need more accommodation. A lot of people respond that their take on monetary policy depends on the data coming in from here on out. For me, the data have spoken very clearly. As I stared at the forecast even before the August FOMC meeting, I had come to the conclusion that things were very different than what I had been expecting in previous meetings. This is a far grimmer forecast than we ought to have. So yes, I’m in favor of more accommodation."
On Bullard's idea of a contingent program, "I'm favorably disposed toward the approach that JIm has mentioned...I just think that far more accomodation is required."
Bullard (Voter): Believes we should have a contingent asset purchase program that has incremental purchases as the situation evolves, rather than a program which either pumps all the money into the system at once or that announces the full amount at the start of the program. That way changes can be made.
Against:
Thomas Hoenig (Voter): "I am convinced that the time is right to put the market on notice that it must again manage its risk, be acountable for its actions, and cease its reliance on assurances that the Federal Reserve, not they, will manage the risks they must deal with in a market economy." (April 7th in Sante Fe.)
Narayana Kocherlakota (Non-voter, but will vote in 2011): "I do not see why they [banks] would suddenly start to use the new ones [excess reserves] if they weren't using the old ones."
Charles Plosser (Non-voter, but will vote in 2011): "It is difficult, in my view, to see how additional asset purchases by the Fed, even if they move interest rates on long term bonds down by 10 or 20 bps, will have much impact on the near-term outlook for employment."
Reasons to Believe QE2 is not coming in November:
1. If economy went into double-dip recession, what then could the Fed do? They'd be literally out of ammunition.
2. Don't know the impact of additional asset purchases. This point has been repeatedly admitted by none other than the Fed members themselves.
Reasons to Hope QE2 is not coming:
1. Bubbles are forming in unproductive asset classes such as gold.
2. Companies are using excess liquidity for M&A which reduces employment.
3. Paul Volcker, the former Fed Chairman, and master stagnation fighter has said that just as a woman can't be a little bit pregnant, the Fed cannot create a little bit of inflation without running the risk of inflation becoming out of control.
4. Soaring commodity prices. $8/gallon gasoline. Heating oil and food prices rise. Americans have even less disposable income. The 70% of GDP that is consumer spend will be be negatively impacted. Recovery will be even weaker as a result. Possible class wars. A broken political system. Both larger and more frequent Tea Party-like political groups forming populist/anarchist/libertarian/mob-like coalitions.
5. New York Fed estimates that the Fed would need to purchase an additional $2T in Treasuries to push down the yield on the 10 year by 100 bps. So, if the worst happens and QE2 ends up being about $1T or 50% growth on our currently $2T monetary base, we will get a mere 50 bps decrease in the 10 year yield. This will have a virtually non-existent effect on the demand for credit, but will certainly provide a hefty blow to the value of the USD.
6. The Fed (along with HFTs, dark pools, etc) is destroying the ability for the market to trade based on fundamentals. With announcements of hiring freezes at Morgan Stanley, 22 straight weeks of equity outflows, rapidly diminishing volume, etc, it is becoming clear that a rigged market will destroy the credibility of what was once (I believe anyway...) a lawful, efficient market system, which in turn will result in job losses in the financial sector which in boom times accounted for some 20+% of GDP.
7. Growing concern over possible (partial-)loss of reserve currency status.
8. On the mere suggestion of possible QE2, the trade-weighted dollar has lost approximately 6% of its value in September alone. This could wreak havoc on global financial markets. The euro has been rising against the dollar, hitting multi-month highs this morning around $1.40. This will be very bad for the eurozone's recovery. Germany, an export led economy, will soon need to increase its rhetoric against competitive currency devaluations or suffer from weaker forward GDP growth. The Japanese look as though the nation could fall back into recession. Their QE2 impacted the Yen positively for all of two days when attempted in the face of US currency destruction. China will become increasingly less interested in purchasing soon to be monetized US Treasuries and in fact, ironically, will see the value of the remnimbi continue to fall as the USD falls.
Dreams regarding QE2
1. That a lower US dollar will increase US exports, assisting in domestic job creation, and leading the US out of slumping economic conditions. This might be true if our economy were not based 20% on manufacturing and 80% on services. Manufacturing might pick up, but not materially so, and again, the American consumer faced with higher commodity prices will see an offsetting drop in demand for discretionary items, further hurting actual export driven nations like China. Probably unwise to kick the stool out from under the emerging markets. For if we hope China, India, and Brazil to lead the world out of economic purgatory, we'd better not up the odds against them.
2. That a lower dollar, and higher stock prices will raise consumer optimism, and thus spending via the wealth effect. WRONG. Higher stock prices, bigger bonuses for executives, etc only create further divisions between the citizenry of the United States. The rich getting richer has been shown over the last thirty years to do nothing to help the poor get richer. If costs rise and quality of life for the bottom 80% starts to take a hit, then expect increased violent crime, theft, calls for secession, etc to begin to boil over. This may over a longer horizon provide an opportunity, as did the Civil War in the 19th Century, to create a more perfect union. But first, we'd have to suffer through a lot of unpalatable changes, especially given the level of 'me-ism' our population (especially amongst our young people) supports and nurtures. There is the possibility that many rude awakenings await our over-fed, under-read citizenry.
3. That lower rates will increase aggregate credit demand. US Households have been de-levering for the past 9 consecutive quarters. QE1 did not have an effect on credit demand, why should QE2?
4. That QE2 is a given. Bernanke was clear that it was on the table, but I think many overstate their talent for clairvoyance. Bernanke in the same comments at Jackson Hole mentioned that much of what the Fed was considering would be the Fed's communication strategy. And he was dead-on in his belief in the efficacy of spoken/written Fed communiques. He mentioned the possibility for QE2, the dollar got absolutely hammered in September, a worldwide currnecy war broke out, the stock market went up, and gold rallied. Probably not all of these consequences were intended (let that be a lesson to you Ben!) but just the suggestion of its possibility seemed to have a rather dramatic effect! Much of the supporting rhetoric driving the belief in QE2 has come from non-voting members of the FOMC including Brian Sack and Goldman Sachs, neither of which have an un-vested interest if you get my drift...?
Realities regarding QE2
1. It is likely that the Fed will take a wait and see approach, which in my mind probably amounts to the start of QE2 sometime late in the year, but in small increments so as not to draw too much populist ire and also to allow for the Fed to change its mind and keep at least some amount of its remaining ammunition on the sidelines, in case of negative GDP in 2011 (for example.)
2. The rhetoric coming from the Fed over the intermediate term will likely continue to show that the Bernanke Put, even if not fully in use, is at the ready.
3. No one knows what exactly will result from QE2. It is not a given that it will have all of even its positive intended consequences. Foreigners may see its very possibility as a need to begin demanding higher rates, otherwise we may begin to see indirect buyers fall as a percentage of Treasury buyers, leaving only the Fed to finance our debt.
Pop quiz: Where does the Fed get the funds it uses to monetize US Treasury debt???
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