Friday, May 17, 2013

Doves & Hawks Together

Thoughts diverge in the FOMC
On how long to hold on to QE,
But in case of deflation,
Without hesitation,
They'll ease up unanimously.

The hottest debate raging right now among the leading lights of the Federal Reserve System is how soon to end quantitative easing, specifically the latest program under which the Fed buys $85 billion of Treasury and mortgage bonds every month.  QE has arguably been a factor in the gradual reduction of unemployment from 8% to the most recent 7.5% figure.  However, there seems to be little doubt that, by depressing rates on low-risk bonds, the Fed has encouraged a frothy run-up in prices of equities and junk bonds.  Thus, notes the Wall Street Journal: "The presidents of the Dallas, Richmond and Philadelphia Federal Reserve banks, long skeptics of the wisdom of the bond buying, said this week that they would like to see the purchases scaled back immediately."

Others are not convinced. Boston Fed President Eric Rosengren said that recent economic data "could lead one to argue that policy has not been sufficiently accommodative."  Over on the West Coast, they're hopeful, but expect labor conditions to improve before scaling back stimulus: "Assuming my economic forecast holds true and various labor-market indicators continue to register appreciable improvement in coming months, we could reduce somewhat the pace of our securities purchases, perhaps as early as this summer," says SFO Fed President John Williams. "Then, if all goes as hoped, we could end the purchase program sometime late this year."

All of this divergence of opinion is layered over a consensus that inflation is hitting the Fed's 2% target. Falling prices could unite the easing and tightening factions in the short-term.  Even "hawkish" Fed governors such as Philadelphia's Charles Plosser agree that any appearance of deflation would be a "game-changer".  If deflation should rear its ugly head, then even an increase in bond purchases would be called for, says Plosser, to show “our commitment that we are willing to provide money at a pace to keep inflation where we want.”

No comments:

Post a Comment

Popular Posts