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The latest FOMC statement suggests Fed Chairman Ben Bernanke has been right thus far, with the economy growing, albeit at a muted pace, on the back of consumption and inflation under control
. Dissent, though, jumped from hawks to doves as Chicago Fed President Charles Evans wanted more accommodation; along with a reference to lower inflation, these two suggest Bernanke has managed to save his last bullet, and will probably bring out the quantitative easing in coming months.Bernanke’s Fed continues to Twist, could be the headline of this piece. On the face of it, the FOMC statement released on Wednesday reveals nothing more than that. But there is a lot more to squeeze out of it when looked at closer.
Unveiled in the September meeting, Operation Twist was Bernanke’s way of buying time, not disappointing markets, and waiting to see how the situation unraveled. With “temporary” factors like Japanese supply chain disruptions and elevated food and energy prices easing, the U.S. economy grew at an annual rate of 2.5%, which is pretty substantial considering most spoke of the rising possibility of a double-dip recession in August.
Bernanke managed expectations at his will, demonstrating he’s got a good read of the markets. While the bearded academic didn’t deliver more QE, he checked on his hand and saved valuable ammunition. The Fed will probably engage in further asset purchases, or quantitative easing, in coming months, as Goldman Sachs’ Jan Hatzius has said before, but they will wait until the conditions are ripe.
The first clue is inflation. “Inflation appears to have moderated since earlier in the year as prices of energy and some commodities have declined from their peaks.”
Bernanke has repeatedly explained that QE, and monetary easing, can be used to avert a deflationary scenario. Hatzius said he expects GDP growth to slow to about 0.5%, barely avoiding a recession, in the first quarter of 2012. In the FOMC statement, the Fed noted “there are significant downside risks to the economic outlook, including strains in global financial markets.” When the economy slows practically to zero, inflation will probably follow suit. Hatzius also said, about a month ago, that he expects QE3 in “six to nine months”.
The second clue is Evans’ dissent. “Voting against the action was Charles L. Evans, who supported additional policy accommodation at this time,” read the release. The latest minutes revealed that several members supported further policy action, and it’s clear that Chairman Bernanke, while not trigger-happy, has what it takes to continue easing.
Former dissenters Fisher, Korchelakota, and Plosser were forced to stand down as inflationary pressures moderated. And, regardless of their opposition to QE, won’t have the power or the votes to stand up to Bernanke.
The fall of MF Global demonstrates that the U.S. economy is not immune to Europe’s sovereign debt crisis. The horrible performance of banks this year, with large Wall Street names like JPMorgan down more than 20% this year and Citi sliding almost 40%, is another demonstration of underlying weakness in the economy. Even the FOMC admitted the economy is at risk, noting, as mentioned above, that downside risks remain, particularly “strains in global financial markets.”
If the economy does indeed slow, as Hatzius believes it will, Bernanke won’t hesitate, and will unveil the next round of quantitative easing.
source: forbes.com
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