FOMC Minutes: QE3 or No QE3?13 July, 2011, 3:25. Posted by Zarathustra
Tags: Economy, Quantitative Easing, United States
The minutes for the 21-22 June 2011 FOMC meeting was out, and people got excited (for a while) as there is a very little hint that at least some of the policy makers are contemplating more monetary stimulus.
In short, the third round of quantitative easing (QE3) might be on the table.
Below is the exact quote which makes everyone excited for a while:
Some participants noted that if economic growth remained too slow to make satisfactory progress toward reducing the unemployment rate and if inflation returned to relatively low levels after the effects of recent transitory shocks dissipated, it would be appropriate to provide additional monetary policy accommodation. Others, however, saw the recent configuration of slower growth and higher inflation as suggesting that there might be less slack in labour and product markets than had been thought. Several participants observed that the necessity of reallocating labour across sectors as the recovery proceeds, as well as the loss of skills caused by high levels of long-term unemployment and permanent separations, may have temporarily reduced the economy’s level of potential output. In that case, the withdrawal of monetary accommodation may need to begin sooner than currently anticipated in financial markets. A few participants expressed uncertainty about the efficacy of monetary policy in current circumstances but disagreed on the implications for future policy.
Quantitative easing is useless, that’s the reality. In a balance sheet recession like the US is having and Japan has been having, money pumped into the banking system only creates reserve, not credit. The broad money supply growth does not really increased much as the private sector is deleveraging. At the same time, the deficit reduction talks in Washington DC will most certain lead to lower government spending and/or higher tax revenue, so the public sector will be deleveraging as well.
Thus we see “a few participants” who “expressed uncertainty about the efficacy of monetary policy”, and rightly so, because it is pretty useless.
In the press briefing of Ben Bernanke after the FOMC meeting currently in question, he ruled out quantitative easing at this juncture mainly because the risk of deflation has disappeared versus in the August of last year as he hinted at QE2 at Jackson Hole. Of course, as I have said quite repeatedly, deflation may still be the big trend here, so no one should be surprised that there will be more quantitative easing if everything falls apart.
The point is: it is useless at the end of the day.
For now, the FOMC is divided at best.