by Kyle Colona on August 17, 2012
The Federal Reserve’s “hawks” are squawking at possible easing by the central bank to spur the economy.
Fed Chairman Ben Bernanke has moved two times before to drop money into the financial system despite such opposition, notes the venerable Wall Street Journal. So the Fed hawks’ squawks don’t mean that the head honcho is backing away from another ambiguous statement earlier this month that QE3 might be in the works. Two previous rounds of so-called “quantitative easing” have had lackluster results in kick starting the economy.
In simple terms, quantitative easing (QE) is an unconventional monetary policy used by the Fed to stimulate the economy when conventional monetary policy has become ineffective. The central bank “buys” financial assets to pump a pre-determined quantity of money into the economy. This is not the same as the usual policy of buying or selling government bonds to keep market interest rates at a specified target value.
But the tepid 1.5% GDP reported for the second quarter has raised alarm bells at the US central bank. Meanwhile some industry analysts note that long term bond yields are rising in response to the recent, albeit slight, upticks in manufacturing and the housing markets. In fact, single family home prices were up by 2% in both June and July. These analysts believe that this is evidence that the long suffering economy is starting to heal and so no further easing is necessary.
That being said, the Journal notes that the recent remarks “highlight the complicated decision Fed policy makers face as they consider whether to launch a new bond-buying program.”
One of the so-called Fed hawks, Charles Plosser, president of the Federal Reserve Bank of Philadelphia, reportedly said this week that additional action by the Fed would be of minimal long-term benefit to the economy. Moreover, the Fed cannot do much more to address problems out of its control which are holding back growth, including public uncertainty about government budgets in Europe and the U.S.
“I’m very dubious. There are diminishing returns to these actions,” Mr. Plosser said.
On the other hand, other Fed officials argue that the economy isn’t growing fast enough to bring down unemployment and that another round of easing is needed. But the fact is that the Fed has pushed short-term interest rates to near zero and the economy’s slump goes on.
The next important tea leave from Mr. Bernanke will come on August 31st when he delivers his annual speech at a Fed retreat in Jackson Hole and this might indicate which way he is leaning, or not. And who said “you don’t need a weather man to know which way the wind blows?”
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Kyle Colona is a New York-based freelance writer and a Feature Writer for CompliancEX and the Wall Street Job Report. He has an extensive background in legal and regulatory affairs in the financial services sector and his work has appeared in a variety of print and on-line publications. You can find him on linkedin.