The FOMC has long been rumored to be considering additional asset purchases along the lines of a third quantitative easing program or QE3 due to the fact that the economy remains rather soft. While these rumors are mostly fueled by the media, the Fed has stated that it is open to further asset purchases if the economy does not improve. Some further deleveraging in the economy might need to occur, which might be keeping the pressure on the Fed to keep an easy money policy. However, many pundits are worried about a continued easy money policy hurting the credibility of the Fed. Some predictions are for core inflation to rise up near 2.7 or 2.8% before coming back down. If this is the case, the Fed might be missing its target in the near term, while still focusing on their long-term goal. Jan Hatzius with Goldman Sachs noted a few reasons to continue believing in further easing by the Fed, one of which is that failure to ease further might be equated to tightening.
For what it is worth, recent Fed statements have said that while the economy is improving, there are still downside risks to growth in the near term. Keeping policy unchanged for the time being is the FOMCs current course of action, but they may shift course by the end of summer if pundits and market analysts are correct.
Questions you might consider
- Find some data that supports the claims made by those that the Fed might need to consider further easing. Why is the Fed considering these actions, and what do they hope to accomplish if they do ease further?
- Go back and look at the impacts of QE2 and/or Operation Twist to see if what the Fed has done in the past had something approximating its desired impact. I’m hoping for data to support your opinion here on further easing or halting to easing. If you want easing halted or reversed, show evidence on inflation beyond an anecdote from a manufacturer seeing his profits squeezed by higher fuel prices.
- Examine profit margins in the last few years since quantitative easing has begun. Is there evidence that inflation is eating away at profits? Are consumers being harmed by ever higher inflation that is not captured by the Fed’s inflation measure? Try to stick to reputable sources when answering these questions.