Fed working on QE3?

posted at 11:20 am on July 13, 2011 by Ed Morrissey

Well … maybe.  Ben Bernanke told the House Financial Services Committee that the Fed would conduct a third round of quantitative easing if they saw a risk of deflation in the economy in the next few months:

Federal Reserve Chairman Ben Bernankesaid Wednesday that the central bank is prepared to provide additional stimulus if the current U.S. economic lull persists. …

Bernanke maintained that temporary factors, such as high food and gas prices, have slowed the economy. He said those factors should ease in the second half of the year and growth should pick up. But if that forecast proves wrong, he said the Fed is prepared to do more.

“The possibility remains that the recent economic weakness may prove more persistent than expected and that deflationary risks might re-emerge, implying a need for additional policy support,” Bernanke told the House Financial Services Committee on the first of two days of Capitol Hill testimony.

Or …

Bernanke also said it was possible that inflationary pressures spurred by higher energy and food prices may end up being more persistent than the Fed anticipates. He said that the central bank would be prepared to start raising interest rates faster than currently contemplated, if prices don’t moderate.

Bernanke’s comments about inflation spoke to concerns expressed by some regional bank presidents at the Fed. The have criticized the Fed’s bond-buying program, saying it has increased the risk for higher inflation.

In other words, Bernanke’s leaving his options open.  If we do enter a deflationary cycle, that could be devastating, and these days, it’s the only thing that the Fed can actually impact.

Reading tea leaves at the Fed is always a dicey proposition, as today’s Washington Post analysis shows.  Even from the notes of the last meeting, Neil Irwin has a tough time deciding what direction the board will take next on monetary policy.  Some members want to keep another round of quantitative easing on the table in case inflation dissipates again, but others are wondering whether the economy has fundamentally changed after such chronically high unemployment that their assumptions have to change:

Federal Reserve officials lack a strong consensus over what they should do next in setting the nation’s monetary policy, according to minutes of their last policy meeting, showing a mix of views as to why the U.S. economy remains weak and what, if anything, they should do about it.

At a June 21-22 meeting, some leaders of the central bank argued that if there were no progress reducing unemployment, the Fed should consider further expanding the money supply — which in practice would mean a third round of “quantitative easing,” or buying hundreds of billions of dollars in Treasury bonds.

That was by no means a consensus, however.  In fact, there seems to be a growing momentum towards tightening the money supply by having the Fed pull cash out of the economy:

Some at the Fed argued that the current situation of moderate inflation with high unemployment suggests there may be more fundamental changes at work in the economy, with workers shifting sectors and losing skills because of long periods of unemployment.

Those structural changes in the economy, these officials argued, “may have temporarily reduced the economy’s level of potential output,” the minutes said. If that’s the case, they added, the Fed may need to start pulling money out of the economy sooner than markets now anticipate. …

Even as some at the Fed are pondering a move toward easing monetary policy, the leaders of the central bank also reached agreement on how they will go about ending the era of easy money when the day comes.

The “era of easy money” will have to come to an end at some point.  As QE2 demonstrated, Fed monetary policy at the extreme of “easiness” has almost no impact any longer on investment or growth.  It serves only as a backstop against deflation.  Because the cost of money is now as close to zero as possible, the Fed can no longer provide short-term boosts through temporary reduction of interest rates.  That makes them all but powerless, especially with an administration that has pursued anti-growth strategies for the last two-plus years in regulatory expansion and signaling of higher taxes.

If the Fed starts to pull cash out of the economy, interests rates will rise, which will make investment even more costly.  It won’t bring us back to the stagflation of the Carter years, when inflation and interest rates skyrocketed, but the stagnation and unemployment will start to calcify in the absence of a reversal of economic policy from Washington.  The best environment for the Fed to back off of its cheap-cash position would be in the middle of an economic boom, but that now looks at least a year away, and more than that if regulatory adventurism and demands for higher taxes continue.

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That’s good news. Because I don’t think paying 4 bucks for a gallon of gas is enough.

Doughboy on July 13, 2011 at 11:23 AM

Ed- link from another thread breaking down monthly gov income compared to its outgoing.

http://blogs.marketwatch.com/fundmastery/2011/07/12/the-u-s-treasury-will-not-default/

Interest on debt is equal to just 10% of that income, leaving enough for Social Security, Medicare and Medicaid, active troop payments and veteran payments.

The monthly income is however 44% less than what the government usually spends each month.

Jay Mac on July 13, 2011 at 11:24 AM

I don’t think he has any idea what will happen or what to do about it.

forest on July 13, 2011 at 11:24 AM

I predict either inflation or deflation.

Akzed on July 13, 2011 at 11:24 AM

Inflation and bad monetary policy is the root source of all our economic woes. We need someone who understands the problem and can take on the fed.

AUH2O on July 13, 2011 at 11:25 AM

If Helicopter Ben decides to go ahead with QE3, is there a damn thing Congress can do about it?

slickwillie2001 on July 13, 2011 at 11:27 AM

I don’t think he has any idea what will happen or what to do about it.

forest on July 13, 2011 at 11:24 AM

He’s a keynesian. He’s absolutely clueless now that he’s discovered his textbook formulas are useless.

AUH2O on July 13, 2011 at 11:27 AM

If Helicopter Ben decides to go ahead with QE3, is there a damn thing Congress can do about it?

slickwillie2001 on July 13, 2011 at 11:27 AM

Repeal the Federal Reserve Act of 1912.

AUH2O on July 13, 2011 at 11:28 AM

Apparently the market is reading this as likely to be stimulus.

BKeyser on July 13, 2011 at 11:34 AM

Elect Ron Paul POTUS, and let him deal with the banksters in a manner that is swift, righteous, and without mercy.

JohnGalt23 on July 13, 2011 at 11:37 AM

Elect Ron Paul POTUS, and let him deal with the banksters in a manner that is swift, righteous, and without mercy.

JohnGalt23 on July 13, 2011 at 11:37 AM

Okay./

gryphon202 on July 13, 2011 at 11:38 AM

test

Cody1991 on July 13, 2011 at 11:39 AM

If the Fed starts to pull cash out of the economy, interests rates will rise, which will make investment even more costly.

“Pull cash out”???? You mean stop printing money out of thin air and inflating the markets? Perish the thought!

Rovin on July 13, 2011 at 11:39 AM

blink on July 13, 2011 at 11:37 AM

Just paraphrasing the AP.

BKeyser on July 13, 2011 at 11:40 AM

Congress fire his butt or make his life hell. We need them to step oup.

Oil Can on July 13, 2011 at 11:41 AM

Elect Ron Paul POTUS, and let him deal with the banksters in a manner that is swift, righteous, and without mercy.

JohnGalt23 on July 13, 2011 at 11:37 AM

Take care of those pesky Jews, too.

/

KingGold on July 13, 2011 at 11:41 AM

Clueless…

PatriotRider on July 13, 2011 at 11:42 AM

Apparently the market is reading this as likely to be stimulus.

BKeyser on July 13, 2011 at 11:34 AM

Huh? Didn’t he say “easing monetary policy further”? He wants to print more effing money! Is he fuc*ing insane?

The dollar isn’t going to be worth a sh!t.

Jaibones on July 13, 2011 at 11:42 AM

QE3 has been predicted for September since this spring by certain parties I follow for economic news.

So yeah, September, end of the world. Get ready.

Vatican Watcher on July 13, 2011 at 11:43 AM

Bernanke the biggest, baddest fund manager in the world
Written by Jamie Coleman
July 13, 2011 at 14:58 GMT

The Fed has turned over $125 bln in profits to the government in the last two-years.

Lots of references in the Q&A to this article, showing the government profited from its interventions during the global financial crisis.

EUR/USD is testing hourly resistance at 1.4170 as we write…

http://www.forexlive.com/

Cody1991 on July 13, 2011 at 11:43 AM

Risk of DELFATION?

I don’t think Helicopter Ben knows the meaning of that word.

We are on the verge of S. American style hyperinflation and this guy is talking about deflation fears. Un-effing real.

angryed on July 13, 2011 at 11:44 AM

Since the “Majic 8 Ball” hasn’t worked for ‘em, maybe they should break out the ouija board…

Gohawgs on July 13, 2011 at 11:44 AM

The price of gold would indicate that QE3 is in dry dock, being prepped for sea.

MJBrutus on July 13, 2011 at 11:44 AM

Bernanke maintained that temporary factors, such as high food and gas prices, have slowed the economy. He said those factors should ease in the second half of the year and growth should pick up. But if that forecast proves wrong, he said the Fed is prepared to do more.

I think they meant “…if that forecast unexpectedly proves wrong…”

Blacklake on July 13, 2011 at 11:45 AM

I think he is defining deflation as the reaction to the absence of qe.

Prices for commodities were inflated up by qe but the fed insisited it was transitory.

This is such a joke. Free markets died in 2009. Welcome to the farce market.

Chubbs65 on July 13, 2011 at 11:45 AM

QE3 has been predicted for September since this spring by certain parties I follow for economic news.

So yeah, September, end of the world. Get ready.

Vatican Watcher on July 13, 2011 at 11:43 AM

The speculation has been that he will announce QE3 at the Jackson Hole, WY conference in August, iirc.

Cody1991 on July 13, 2011 at 11:46 AM

The best environment for the Fed to back off of its cheap-cash position would be in the middle of an economic boom, but that now looks at least a year away, and more than that if regulatory adventurism and demands for higher taxes continue.

Yes, Obama will see the light and have a come to Jesus moment on the campaign trail, Hallelujah! Win re-election and dwell in the House of Hayek 4 more!

cartooner on July 13, 2011 at 11:47 AM

KingGold on July 13, 2011 at 11:41 AM

Please take note of who broke Semtic trump this round.

JohnGalt23 on July 13, 2011 at 11:49 AM

So I guess all those super smart MSM pundits were F-ING WRONG about another QE.

The end is near, folks.

PattyJ on July 13, 2011 at 11:50 AM

I predict either inflation or deflation.

Akzed on July 13, 2011 at 11:24 AM

Yep! He sure crawled out on a limb with that speech.

cartooner on July 13, 2011 at 11:50 AM

Elect Ron Paul POTUS, and let him deal with the banksters in a manner that is swift, righteous, and without mercy.

JohnGalt23 on July 13, 2011 at 11:37 AM

Then we can find out who was REALLY behind 911!

/

^ Is that really needed for this?

Kelligan on July 13, 2011 at 11:54 AM

Wait…so the feds give unions a few hundred billion, and spends tens of millions more in schemes to usurp our Constitutional rights….and this helps the economy.

*scratches*

Bishop on July 13, 2011 at 11:54 AM

Elect Ron Paul POTUS, and let him deal with the banksters in a manner that is swift, righteous, and without mercy.
JohnGalt23 on July 13, 2011 at 11:37 AM

I wouldn’t let Ron anywhere near the presidency. Though making him the chairman of the fed just might fix multiple problems.

Count to 10 on July 13, 2011 at 11:55 AM

No, Quantitative Easing is different than government spending stimulus. blink on July 13, 2011 at 11:37 AM

Bull! It is still creating/buying/printing money to effect the markets producing a completely phony perception of stability. This is exactly what the stimulus did under the guise of giving this money to the public infrastructure instead of the financial markets—both programs have been sponsored by the government and have NOT allowed “regular market conditions” to correct themselves, creating a false economy. While you’re saying they are “different”, the results are both the same by shifting water from one sinking boat to another.

Rovin on July 13, 2011 at 11:56 AM

Oh the joys of living under Obama!

When he entered office, he claims he found America’s economy in the toilet.

But since then, he’s spent three years flushing.

Dr. Charles G. Waugh on July 13, 2011 at 11:57 AM

Let the economy crash. We can start the recovery.

If we had not manipulated the economy with Bail outs and QE2, we would be 3 years into a recovery already.

portlandon on July 13, 2011 at 11:58 AM

Governors are appointed by the President of the United States and confirmed by the Senate for staggered 14-year terms.[38] The Board is required to make an annual report of operations to the Speaker of the U.S. House of Representatives.

The Chairman and Vice Chairman of the Board of Governors are appointed by the President from among the sitting Governors. They both serve a four year term and they can be renominated as many times as the President chooses, until their terms on the Board of Governors expire.[62]

It’s time to haul this guy in front of congress and just make his life hell. Congress please step up.

Oil Can on July 13, 2011 at 11:59 AM

But since then, he’s spent three years flushing crapping in the toilet.

Dr. Charles G. Waugh on July 13, 2011 at 11:57 AM

fixed

PatriotRider on July 13, 2011 at 12:00 PM

If you calculate inflation the same way as during the Carter years, it’s well over 20%.

The numbers coming out of the 0bama regime are pure grade A BS. We are on the cusp of hyper-inflation, not deflation.

Rebar on July 13, 2011 at 12:02 PM

Qe is certainly stimulus. By buying our bonds to the tune of 70%, they are enabling our deficit spending. Call it unofficial stimulus.

Chubbs65 on July 13, 2011 at 12:11 PM

If Helicopter Ben decides to go ahead with QE3, is there a damn thing Congress can do about it?

slickwillie2001 on July 13, 2011 at 11:27 AM

Arrest him, charging him with devaluing our currency under Section 19 of the Coinage Act of 1792, then put him on trial, seeking the death penalty as the law demands.

Yeah, I know… will never happen…

dominigan on July 13, 2011 at 12:13 PM

MJBrutus on July 13, 2011 at 11:44 AM

Yep, gold‘s going up again, appears to be headed to break $1600.

And business is brisk at AmmoMan’s place.

petefrt on July 13, 2011 at 12:13 PM

If you calculate inflation the same way as during the Carter years, it’s well over 20%.
The numbers coming out of the 0bama regime are pure grade A BS. We are on the cusp of hyper-inflation, not deflation.
Rebar on July 13, 2011 at 12:02 PM

Zerohedge had an article about our dear congress critters talking about a new way to calculate CPI to further hide the effects of their policies.

The story was 2-3 weeks ago.

Chubbs65 on July 13, 2011 at 12:14 PM

And business is brisk at AmmoMan’s place.
petefrt on July 13, 2011 at 12:13 PM

ROFL, I can’t tell you how many times I’ve had to wait for ammo to arrive.

Want to know the signs that things are about to implode, watch the big ammo and magazine sellers, they will let you know.

Bishop on July 13, 2011 at 12:15 PM

Of course there will be QE3 and then QE4 and on and on and on. Any rhetoric to the contrary theyt have no choice.
It’s all like a bad Hollywood remake.

http://theeveningchronicle.blogspot.com/

LCT688 on July 13, 2011 at 12:22 PM

When the Fed straddles the fence on a decision, the world dumps dollars. It’s that simple. Bernanke “leaving his options open” destroys confidence in our currency, and the uncertainty will push us into the next recession quicker than if he either said a direct “yes” or “no” to QE3. Now, granted that QE3 will worsen our economy by itself, but that’s a direct consequence which can be measured, and blame assigned. The intangibles bsaed on indecision cannot.

This situation is pretty much a “Do something, even if it’s wrong” scenario.

Freelancer on July 13, 2011 at 12:25 PM

I predict either inflation or deflation.

Akzed on July 13, 2011 at 11:24 AM

Yep! He sure crawled out on a limb with that speech.

cartooner on July 13, 2011 at 11:50 AM

When one considers that his predecessor would routinely predict inflation and deflation is this an improvement?

MJBrutus on July 13, 2011 at 12:36 PM

The way to crush the bourgeoisie, is to grind them between the millstones of taxation and inflation.

Vladimir Lenin Barack 0bama

Rebar on July 13, 2011 at 12:46 PM

Elect Ron Paul POTUS, and let him deal with the banksters in a manner that is swift, righteous, and without mercy.

JohnGalt23 on July 13, 2011 at 11:37 AM

Because he’s been giving the FED hell in his new oversight position? Oh wait, you haven’t heard a peep from him, since he got the new job. He just stated that he wouldn’t run for re-election to congress if he fails in his run for president. Will we finally see the fight we’ve all been waiting for when he’s no longer campaigning?

DFCtomm on July 13, 2011 at 12:49 PM

Democrat friends will blame Bush.

a recent quote from a friend that’s a Dem.

“it will take 20 years to undo the damage Bush has done.”

PappyD61 on July 13, 2011 at 12:51 PM

Quantitative easing is half the cause of high food costs.

Slowburn on July 13, 2011 at 2:10 PM

A post in which Ed Morrissey tries to pretend he knows anything about central banking and monetary policy.

“[One of the basic planks of socialism is] centralization of credit in the hands of the state, by means of a national bank with state capital and an exclusive monopoly.” – Karl Marx

“The establishment of a central bank is 90% of communizing [socializing] a country.” – Vladimir Lenin

“Print is the sharpest and strongest weapon of our party.”- Joseph Stalin

“Let me issue and control a nation’s money and I care not who writes the laws.” – Mayer Amschel Rothschild, 1790

“Control oil and you control nations; control food and you control the people; control money and you control the world.” – Henry Kissinger, 1970

“Whoever controls the volume of money in our country is absolute master of all industry and commerce…and when you realize that the entire system is very easily controlled, one way or another, by a few powerful men at the top, you will not have to be told how periods of inflation and depression originate.” – President James A. Garfield, 1881

“This Act [the Federal Reserve Act, Dec. 23rd 1913] establishes the most gigantic trust on earth. When the President [Woodrow Wilson] signs the Bill; the invisible government of the Monetary Power will be legalized. The people may not know it immediately, but the day of reckoning is only a few years removed. The worst legislative crime of the ages is perpetrated by this banking and currency Bill. The new law will create inflation whenever the trusts want inflation. From now on, depressions will be scientifically created.” -Congressman Charles Lindbergh, Sr

iamse7en on July 13, 2011 at 2:12 PM

Printing money is what finally sunk the French Revolution. Our checks and balances gave us 235 years to enjoy liberty before crashing against the same wall.

Sad.

PattyJ on July 13, 2011 at 3:16 PM

It is truly frightening how such utter morons are in charge of our monetary policy. To quote one of the wisest minds on the Left (I forget who it was…):

“If at first you don’t succeed, fail, fail again!”

seanrobins on July 13, 2011 at 4:53 PM

that now looks at least a year away

Actually, it seems to be till sometime after Obama is retired, just as it has since he was elected.

burt on July 13, 2011 at 6:18 PM