Fed Hints at Potential of QE2

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The Fed, in it’s FOMC meeting notes (September 2010), announced that it might be using quantitative easing again this year, with the market calling it QE2. In it’s September meeting, it echoed sentiments from its August meeting about the slowing economy and stated that the Committee is prepared to provide “additional accommodation” if necessary – codeword for quantitative easing.

Why is this notable? If the economy were really recovering as nicely as many of us would like to believe, then quantitative easing wouldn’t be necessary. If we’re back on track and we aren’t facing deflation, QE1 worked, and we should just continue on with business as usual. By mentioning the potential for another round of quantitative easing, the FOMC introduces the idea that maybe we’re not recovering as nicely.

Don’t get too excited though, last week the WSJ said that QE2 might not happen…

It’s also important to note that in the notes they said that “Information received since the Federal Open Market Committee met in August indicates that the pace of recovery in output and employment has slowed in recent months.” (matching what they said in August about June data) and “… the pace of economic recovery is likely to be more modest in the near term than had been anticipated.” (also matching August).

The zinger was this line – “The Committee will continue to monitor the economic outlook and financial developments and is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate.” That’s the one that seems to predict some future quantitative easing, potentially at November 2nd-3rd meeting today and tomorrow.

I suppose we’ll see what actually happens but the market has already priced in the fact that additional accommodations will be provided.

{ 7 comments, please add your thoughts now! }

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7 Responses to “Fed Hints at Potential of QE2”

  1. billsnider says:

    If you were an adult with a family in the early to mid 70’s, you know how bad inflation can be. It was devastating.

    There are two classical cures for inflation. One is higher productivity, which is what partially got us out of this mess, and the second is higher unemployment in order to cool the economy.

    By trying to speed up the economy, the unintended consequence may be that it will slow it down.

    It is very difficult and painful to solve.

    I hope and pray that we don’t get this far.

    bill snider

  2. A stable money supply is the best way to cure inflation.

  3. Brian says:

    It should quite interesting to see if they adopt this approach and what affect this has on the stock markets tomorrow in combination with the election results from today.

  4. Stu says:

    I absolutely think that another round of money pumped into the economy would be a good think, even if the Obama stimulus hasn’t had the impact people thought it would or should have.

    The impact of QE2 would be to keep interest rates low (as they have been for some time now) and hopefully give business enough confidence to start expanding and hiring (which they slowly have been doing already).

    The risk is hyperinflation which can be cured by raising interest rates (the other risk is that the money doesn’t create jobs as anticipated, resulting in “stagflation,” hopefully that doesn’t happen).

    • billsnider says:

      Low interest rates were in part what caused the housing problem. So that is not always the best solution. Also we currently have historically low rates and that is not stimulating enough house sales.

      As to higher rates being good, in the 70’s, CD’s were paying over 18!. Can you even imagine that today? And yet no one was happy because things were going up even faster. So don’t assume that hyperinflation can be cured by higher interest rates.

      Bill Snider

  5. FlyFisher says:

    QE is a scary thing IMO. It might help, but i think the uncertainty factor is the biggest thing holding back the economy right now. Not knowing whether the FED is going to tip the iceberg of hyperinflation doesn’t ease my thoughts.

    • billsnider says:

      if this solution did not come with HUGE risks, the Fed would have done it by now.

      Bill Snider

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