By Steven K. Beckner

(MNI) – Is a new round of quantitative easing a done deal?

Fed watchers, including some who think “QE2″ would be unwise, are
convinced it is not only inevitable, but that it’s virtually a sure bet
at the close of the Nov. 2-3 Federal Open Market Committee meeting.

Fed sources say the wind is definitely blowing in that direction,
but that it’s not a sure thing.

Only one man can validate or invalidate overwhelming market
expectations, and Fed Chairman Ben Bernanke has an opportunity to do one
or the other when he speaks Friday morning to a Boston Federal Reserve
Bank conference on “Revisiting Monetary Policy In A Low Inflation
Environment.”

Will Bernanke make clear he wants to go ahead on Nov. 3? Will
he defer respectfully to what is apt to be a lively debate with his FOMC
colleagues in three weeks? Or might he even suggest that more time
is needed before judging whether QE2 is really needed? We’ll see.

In the meantime, the market consensus that key Fed policy-makers
have “signalled” impending quantitative easing at the upcoming FOMC
meeting seems like a curious conclusion in a way. That’s because it’s
hard to find public official comments specifically advocating QE2 on
Nov. 3, even among the most vocal believers in the efficacy of
quantitative easing.

Unquestionably, there have been prominent expressions of support
for Q.E. in general terms. New York Fed President William Dudley, among
others, has voiced strong leanings toward some kind of Q.E. some time in
some amount. Indeed, seldom have top policy-makers pushed a position so
zealously ahead of an FOMC meeting.

But where are the overt official calls for a particular kind of
action on Nov. 3? They don’t really exist.

In a Sept. 29 interview with Market News International, Boston Fed
President Eric Rosengren, a current FOMC voter, said the Fed is
“missing” on both aspects of its dual mandate, with unemployment far
above and inflation far below the Fed’s stated goals. And he said, “if
we decide to do something going forward, I think we should take a hard
look at purchases of Treasury or mortgage backed securities.”

Rosengren made clear he would support asset purchases unless the
economy improves. “If unemployment was going to stay at 9.6% and the
core (consumer price index) was going to stay at nine tenths of a
percent for as far as the eye can see that would not be getting us where
we want to go. So it’s not just moving away from where we are, we need
to see improvements from where we are because we’re not where we want
to be.”

However, Rosengren said he was keeping “an open mind” and that the
FOMC’s precise choices would be “situational.”

Two days later, Dudley said, “further action is likely to be
warranted unless the economic outlook evolves in a way that makes me
more confident that we will see better outcomes for both employment and
inflation before too long.” He said the Q.E. impact on long-term rates
would be “significant.”

The FOMC vice chairman called current job and inflation levels
“unacceptable” and warned disinflation could intensify.

Dudley even used a figure — $500 billion — which has since become
widely cited as the minimum the Fed ought to do, though probably not all
at once.

But Dudley, who has been far more outspoken on monetary policy
issues than his predecessors, said he didn’t want to “prejudge” what
policy he will advocate at the November meeting.

Brian Sack, who heads the New York Fed’s open market trading desk,
took the unusual step of publicly echoing Dudley last Monday, declaring
that increased Fed purchases of securities would indeed be effective in
lowering long-term interest rates and providing monetary stimulus to the
economy.

“In my view, the evidence suggests that the expansion of the
securities portfolio to date has helped to foster more accommodative
financial conditions, and further expansion would likely provide
additional accommodation …,” Sack said. “(B)alance sheet expansion
appears to push financial conditions in the right direction, in that it
puts downward pressure on longer-term real interest rates and makes
broader financial conditions more accommodative.”

As for concerns that lower long-term interest rates will not spur
growth, Sack said, “This point is overstated in my view.”

But Sack, who has been coordinating purchases of long-term Treasury
securities using proceeds of maturing mortgage backed securities and
would be responsible for managing any expanded bond buying, said the
FOMC will need to weigh the costs and benefits of renewed Q.E.

That same Monday, Oct. 4, at an appearance in Rhode Island,
Bernanke commented favorably on the potential impact of Q.E.: “I don’t
have a number to give you, but I do think that the additional purchases,
although we don’t have precise numbers, have the ability to ease
financial conditions.”

Bernanke’s brief comment was interpreted as yet another call for
near-term QE2 — another “signal.” But was it? He had already said in
his Aug. 27 Jackson Hole speech that Q.E. could be effective. What was
so new?

Chicago Fed President Charles Evans, who will be an FOMC voter next
year, has made no secret of his leanings toward QE2 in recent weeks. And
last Thursday he amplified them, telling The Wall Street Journal: “In
the last several months I’ve stared at our unemployment forecast and
come to the conclusion that it’s just not coming down nearly as quickly
as it should.”

Because “this is a far grimmer forecast than we ought to have,”
Evans said he favors “much more [monetary] accommodation than we’ve put
in place.”

Evans certainly sounded like he is ready to support imminent QE2,
but he doesn’t have a vote on Nov. 3.

One who does now have a vote is former San Francisco Fed President
Janet Yellen, who was just recently sworn in as Vice Chairman of the
Federal Reserve Board. She is widely seen as a vote for QE2, and it is
assumed that fellow Obama appointee Sarah Raskin, another newly minted
board member, will follow her lead. A third Obama appointee, Nobel Prize
winner Peter Diamond, is presumed to be another “yes” vote once he wins
Senate confirmation.

Yet, in her first speech as Bernanke’s top deputy this Monday in
Denver, Yellen spoke very cautiously and did not even address current
monetary policy issues explicitly.

Most noticed was Yellen’s remark that “it is conceivable that
accommodative monetary policy could provide tinder for a buildup of
leverage and excessive risk-taking in the financial system.”

Was reputed super-dove Yellen hinting that maybe the Fed should go
slow in making an already easy monetary policy even easier?

Most likely not. On the contrary, when taken with her comments
about “leaning against the wind,” “taking away the punch bowl” and using
both monetary and macroprudential policy to counter asset bubbles,
Yellen’s remarks could be seen as a kind of justification for proceeding
with more Q.E.

Yellen, speaking to the annual meeting of the National Association
for Business Economics, may have been setting up a kind of safety valve
for the Fed to supplement its exit strategy tools. In other words, she
may well have been saying that the Fed can afford to take the risk up
front of being aggressively expansionary and possibly fuelling asset
price booms, if not actual inflation, because it is willing and able to
use a panoply of tools to negate or at least diminish that risk on the
other end.

Still, it is noteworthy that Yellen did not choose to echo the kind
of sentiments expressed by Rosengren and Dudley and come out foursquare
for QE2 at some point.

Meanwhile, other voices have been even less supportive of QE2 if
not openly hostile.

St. Louis Fed President James Bullard, another current FOMC voter,
is known to be open to QE2. But last Friday, as the Labor Department
reported a 95,000 September drop in non-farm payrolls and an unchanged
9.6% unemployment rate, he said on CNBC that it is “not a slam dunk.”

“We have got some time between now and the meeting,” said Bullard.
“Things can happen, data comes in. All of us have to redo our forecasts,
including me, I haven’t done it yet.”

“This is unchartered waters…,” Bullard said, adding that
inflation “may get away from us if we are not careful.”

QE2 is “a tough call because we did hit this soft patch in the
economy but it is not so soft that it is obvious that we have to do a
lot right now,” he said. “It is still possible to make the case that the
economy will improve naturally on its own in 2011 and that we’ll have
faster growth and that we’ll get inflation closer to target in 2011
without taking all these risks that come with expanding the balance
sheet further.”

Bullard said “the natural thing for the Committee to do if it felt
that way would be just to say, ‘Well, we’ll just wait until the December
meeting or we’ll wait until January until we have more data on the
economy.” he continued. “That is a common thing the committee might
do.”

Fellow 2010 FOMC voter, Cleveland Fed President Sandra Pianalto has
also been reticent about openly supporting near-term QE2. Minneapolis
Fed President Narayana Kocherlakota, who will be voting next year, has
said that Q.E.’s impact on long-term rates and inflation expectations
would likely be “muted.”

(more)

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