By Steven K. Beckner

(MNI) – The Federal Reserve’s Federal Open Market Committee
statement Tuesday was seen by many as setting the stage for renewed
quantitative easing — almost as a signal of forthcoming large-scale
asset purchases.

But that’s not the way to look at it.

In its Sept. 21 rate announcement, the FOMC said it “will continue
to monitor the economic and financial developments and is prepared to
provide additional accommodation if needed to support the economic
recovery and return inflation, over time, to levels consistent with its
mandate.”

In wake of Fed Chairman Ben Bernanke’s Aug. 27 Jackson Hole
assertion that the Fed is “prepared to provide additional monetary
accommodation through unconventional measures if it proves necessary,”
the FOMC policy statement was widely seen as the next inexorable step
down the road toward a resumption of quantitative easing.

In fact, there is no inevitability.

The FOMC chose not to definitely telegraph coming Fed action or to
establish a clear timeframe or trigger. That’s because there is ongoing
uncertainty about the outlook and considerable disagreement among FOMC
members about what more needs to be done, if anything, and what more can
be done effectively.

The FOMC statement is highly conditional, as indeed Bernanke’s
Jackson Hole comments were, Market News understands.

The FOMC said it will “monitor” developments and provide additional
stimulus “if needed” to promote economic growth and insure that
inflation rises from unacceptably low levels. The latter condition was
prefaced by a statement of the Committee’s expectation that “inflation
is likely to remain subdued for some time before rising to levels the
Committee considers consistent with its mandate.”

In other words, the FOMC expects inflation to return to the
implicit target range of 1.7% to 2.0% eventually without further help
from an already extraordinarily accommodative monetary policy.

(In July, for the fourth month in a row, the core price index for
personal consumption expenditures — the Fed’s favorite inflation gauge
— was up 1.1% compared to a year earlier).

Bernanke has said that action would be warranted “if the outlook
were to deteriorate significantly,” and he was speaking of both the pace
of inflation and the pace of recovery. Minutes of the last FOMC meeting
show members wanting to see the economy “weaken appreciably” before
further quantitative easing is contemplated.

At its next meeting Nov. 2-3, the FOMC will be making a new set of
three-year, quarterly forecasts of GDP growth, unemployment and
inflation.

If data on growth, jobs and inflation in the meantime lead the FOMC
to “significantly” downgrade its forecasts, then additional quantitative
easing becomes a real possibility. But there is nothing definitely
planned at this stage.

There are officials who would willingly support further asset
purchases to exert further downward pressure on already low long-term
interest rates. But others are more reluctant, and some are opposed
unless the situation deteriorates dramatically.

While some would support further quantitative easing if the data do
not improve from here, others would only do so if the data worsen
relative to expectations.

The central tendency forecasts of Fed presidents and governor,
which will be publicly released along with the Nov. 2-3 FOMC minutes
three weeks after the meeting, will obviously be very important.

** Market News International **

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