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Fed Hints at Potential of QE2

The Fed, in it’s FOMC meeting notes (September 2010 [3]), 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 [4].

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 [5] 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.