The Federal Reserve has just released minutes from its September 21 meeting, and it does seem that the path towards a new round of quantitative easing, starting as early as November, is set.
Although there are still a few hold-outs who believe the threshold for action should be higher and involve further deterioration in the economy, Ben Bernanke, Fed chairman, seems to have forged a consensus along the belief that conditions are already bad enough to warrant more monetary stimulus.
Arguably the most interesting segment of the minutes came when officials began reviewing the benefits and costs of additional easing, and the “best means to calibrate and implement such [asset] purchases”. Read more
The Fed should announce a one-time only rise in inflation rather than pumping billions into a large, liquid and arguably overbought bond market. This from Michael Woodford, professor at Columbia University and author of Interest and Prices: Foundations of a Theory of Monetary Policy. The benefit, he argues, lies in increased inflation expectations.
Debate over QE2, he says, is raging at the Fed. Large-scale asset purchases are back on the menu. “This would be a dramatic move. But we must not kid ourselves,” he says. “It would have at best a modest effect in a large, liquid market such as Treasury bonds.”
There is another option, he goes on. The Fed could clarify its ‘exit strategy’ – namely, that it is not planning on exiting any time soon, even if inflation were to rise temporarily above the Fed’s mandate. Such a statement would reduce the path of expected short-term interest rates and increase the expected rate of inflation. This is not to say that the Fed should increase its inflation target: market perceptions of continuing high inflation could be counter-productive.
Instead, as suggested in a recent speech by William Dudley
If Adam Posen’s message last month was, “The case for doing more”, David Miles, another external MPC member has followed with a very clear speech today, which can be summarised as, “The case for not doing less”.
At no point does Mr Miles consider doing more, but he is very critical of those – i.e. Andrew Sentance – who believe monetary policy should be tightened.
If this were a typical recovery, Mr Miles said, there would be a case for raising interest rates now. He cannot prove it will not be a typical recovery, but believes that the upswing will be far from normal:
“A typical downturn is not one in which the financial sector all but stopped working for a while. A typical cycle for the UK is not one in which the exchange rate depreciates by about 25% ahead of the downturn.”
UK retail prices rose 0.4 per cent in September, above expectations of a 0.1 per cent increase. Annual retail price inflation is now 4.6 per cent, down from 4.7 per cent but higher than the 4.4 per cent expected.
Consumer prices were flat on the month, meaning that annual inflation stays at 3.1 per cent, above the government’s target of 2.0 per cent and above equivalent EU and US measures. Read more