By Steven K. Beckner
October purchasing managers’ surveys showed a faster pace of
activity in both manufacturing and non-manufacturing industries. The
Commerce Department estimated that the gross domestic accelerated from
1.7% in the second quarter to 2.0% in the third quarter as consumer
spending grew 2.6%, fastest pace since the fourth quarter of 2006.
Ahead of the October employment report, the labor market data have
looked encouraging. First-time jobless claims have fallen substantially
for two weeks in a row to their lowest level since early July. And both
purchasing managers surveys, as well as the ADP report, showed a pick-up
in hiring. Friday’s report is expected to show the unemployment rate
unchanged at 9.6% despite a projected 81,000 gain in private payrolls.
Inflation, while remaining positive, has slowed further, according
to the latest data, fueling concerns among Fed officials that it is
below levels “consistent” with the Fed’s price stability mandate. In
September, the core chain weighted price index for personal consumption
expenditures was up 1.2% year-over-year — below the Fed’s long-term
forecast and implicit target of 1.7% to 2.0% for the overall PCE index.
As for inflation expectations, the University of Michigan’s
consumer sentiment survey shows a five-year forecast of 2.7% to 2.8%.
The five-year “break-even” spread between regular and inflation
protected (TIPS) Treasury securities has been running between 1.5% and
1.6%.
Those numbers had led some officials to argue vehemently in recent
weeks that QE2 was not needed.
In dissenting, the Fed revealed that Hoenig “believed the risks of
additional securities purchases outweighed the benefits.” He “also was
concerned that this continued high level of monetary accommodation
increased the risks of future financial imbalances and, over time, would
cause an increase in long-term inflation expectations that could
destabilize the economy.”
If the Fed’s first round of quantitative easing, adopted in the
throes of the financial crisis, provides any guidance for how QE2 might
go, it is worth recalling that the FOMC announced up front the size and
timing of its asset purchases, but later made upward adjustments.
On Nov. 25, 2008, the Fed announced purchases of up to $100 billion
in agency debt and up to $500 billion in agency-guaranteed mortgage
backed securities “over several quarters.”
On March 18, 2009, the FOMC decided to increase MBS purchases by
$750 billion to a total of up to $1.25 trillion “this year,” i.e. 2009.
The FOMC also doubled the amount of agency purchases to $200 billion.
And it announced it would purchase “up to $300 billion of longer-term
Treasury securities over the next six months.”
The FOMC subsequently announced adjustments to the timing of its
purchases, but only modest changes to the size of purchases.
After its Aug. 12, 2009 meeting, the FOMC announced that it would
“gradually slow the pace” of Treasury securities purchases and
anticipated that the full amount of $300 billion would be purchased “by
the end of October” of that year.
The FOMC further tweaked its asset buying program at its Nov. 4,
2009 meeting. Having completed $300 billion in Treasury securities
purchases, it reduced the amount of planned agency debt purchases from
$200 billion to $175 billion. And it said it expected to complete
purchases of both those agency securities and MBS “by the end of the
first quarter of 2010.”
The first round of Q.E., totaling $1.725 trillion, was completed
on schedule at the end of March of this year. And while there was no
expectation that the Fed would sell assets anytime soon, the plan was
that the Fed would allow a gradual shrinkage of its securities portfolio
and its balance sheet by allowing maturing securities to run off.
That policy was changed at the Aug. 10, 2010 meeting, when the FOMC
decided to “keep constant the Federal Reserve’s holdings of securities
at their current level by reinvesting principal payments from agency
debt and agency mortgage-backed securities in longer-term Treasury
securities.”
The New York Fed said it would aim to maintain the face value of
outright holdings of domestic securities in the system open market
account at $2.054 trillion, the amount that prevailed as of Aug. 4,
2010.
If the $600 billion of planned purchases does not achieve the Fed’s
hoped for objectives, Hoenig, among others, has expressed the fear that
the Fed will be tempted to do more and more Q.E. — further expanding
the balance sheet and complicating the Fed’s eventual task of exiting
from a super-accommodative monetary policy.
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** Market News International Washington Bureau: 202-371-2121 **
[TOPICS: M$U$$$,MMUFE$,MGU$$$,MFU$$$,MT$$$$,M$$BR$]
