By Brai Odion-Esene
WASHINGTON (MNI) – Although some Fed watchers continue to question
the efficacy of any further action by the Federal Reserve to counter
what appears to be slowing growth, there is broad agreement that the
central bank is leaning towards more action, especially if conditions
worsen.
Less certain is whether policymakers will act at the end of their
two-day meeting on August 1 or maintain a holding pattern until their
September meeting.
During his last day of back-to-back testimony on Capitol Hill about
the economy and monetary policy last week, Fed Chairman Ben Bernanke
made it clear the trigger for additional monetary stimulus will be any
sign that job creation in the United States has ground to a halt.
“We are committed to make sure that we continue to have improvement
on employment,” Bernanke told members of the House Financial Services
Committee.
“It’s certainly possible that we will take additional action if we
conclude that we are not making progress towards higher level of
employment,” he added.
The Fed’s policymaking Federal Open Market Committee meets on July
31 and August 1, and recent articles in major news publications have
raised expectations that the Fed could leap back into the fray sooner
than anticipated to aid the flagging recovery.
“The coordinated barrage of stories about the Fed preparing for
more easing has made us think that the chances of a policy move next
week are higher than we had previously thought,” HSBC Chief U.S.
Economist Kevin Logan wrote in a research note.
Following the FOMC meeting on June 19-20, the general forecast was
for the Fed to go into pause mode until the September 12-13 meeting,
when a program of additional asset purchases — likely focused on
Treasury and mortgage-backed securities — was expected to be announced.
Logan noted, however, that if Fed officials are truly “impatient”
with the economy’s sluggish growth and persistent high unemployment,
“then they may not wait another two months to see if the economy begins
to grow sufficiently to bring down the unemployment rate.”
Ethan Harris, co-head of Global Economics at Bank of
America-Merrill, sees the Fed taking action following the July-August
meeting, but tells MNI he believes it would first tweak its forward
guidance language, with the asset purchases coming in September.
Well Fargo Securities Chief Economist John Silvia believes the
increasingly dampening effect of the eurozone crisis on the U.S. economy
has increased the prospect of the Fed taking preemptive action rather
than waiting for a major shock.
Huntington National Bank’s Director of Economics George Mokrzan,
however, says it is still too soon to forecast a third round of
quantitative easing by the Fed.
While the central bank is certainly crafting a contingency plan in
the event things take a turn for the worse, this is just part of normal
strategic planning, he told MNI, and any future action remains
conditional on the economy entering a “weaker state.”
There are few things that must be considered in any discussion
about whether the Fed will act, when it will decide to do so, and what
manner of stimulus it will choose.
First, there is no press conference scheduled following the FOMC
meeting next week, meaning if the Fed does announce an asset purchase
program, it will not have the opportunity to immediately explain the
reasons behind its move to financial markets.
It is just as important to note, given the Fed’s focus on the pace
of job creation, that the July nonfarm payrolls report will not be
released until August 3, two days after the end of the FOMC meeting.
Holding off until September before unveiling QE3 might also allow
the Fed more time to observe events in Europe, as well as any progress
made here at home with regards to the looming fiscal cliff.
The declaration by European Central Bank President Mario Draghi
Thursday that the ECB is ready to do whatever it takes, within its
mandate, to ensure the survival of the euro — and the reassurance that
gave to markets — could buy the Fed some time.
One argument for the Fed acting sooner rather than later is the
current combustible political climate in the United States. While
Bernanke and other Fed officials have repeatedly said politics play no
role in monetary policy decisions, the fact remains that policy is not
conducted in a vacuum.
The Fed has no desire to insert itself into the ongoing pitched
battle in Washington, and wanting to avoid incurring the ire of its
opponents on the Hill could also be one reason why the Fed chooses to
act on August 1 as opposed to waiting until its mid-September meeting.
After all, one could argue it is better to announce a potentially
controversial third round of quantitative easing next week — allowing
for only two days for Fed-bashing before lawmakers leave Washington for
the summer on Aug. 3 — compared to taking action in the middle of
campaign season and a month and a half before the November elections.
There is also the matter of the hawk-dove divide within the FOMC,
and the question of which side will make the more compelling argument
for, or against, additional monetary stimulus.
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** MNI Washington Bureau: 202-371-2121 **
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