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Rumors of QE fly again

By Sheyna Steiner · Bankrate.com
Wednesday, June 6, 2012
Posted: 5 pm ET

Here we are again. The economy has, as they say, hit a soft patch, and another meeting of the Federal Open Market Committee, FOMC for short, is quickly approaching. The FOMC, the group responsible for setting monetary policy, meets June 19 and 20.

Also happening this month, Operation Twist ends. Operation Twist is the easing half-measure begun last fall in which short-term bonds already held by the Fed were switched with longer-term bonds.

The question that no one can stop asking, no one in the financial media anyway, is: will the Fed embark on another round of quantitative easing?

Since the ugly May jobs report, many stories have been published gauging the sentiment among FOMC members and addressing what the Fed could do.

For instance, according to story on the International Business Times from Tuesday, "Two Fed officials cool to policy changes," at least one FOMC member, Sandra Pianalto, president of the Federal Reserve Bank of Cleveland, believes that the "May jobs report does not warrant further monetary policy easing."

Another FOMC member, non-voting this year, James Bullard, president of the St. Louis Federal Reserve Bank, said that the May jobs report was "disappointing but not enough to substantially alter the contours of the U.S. outlook," according to the June 5 Bloomberg.com story, "Fed's Bullard says jobs slump hasn't changed outlook."

Not everyone on the committee may agree with that assessment. The president of the Federal Reserve Bank of Atlanta, Dennis Lockhart gave a speech in Florida on Wednesday that indicated more willingness to consider all options, according to the Wall Street Journal story "Lockhart says Fed must stand ready to provide more support."

Lockhart said that low long-term bond yields aren't the only objective to quantitative easing programs, "it is also important when investors are forced to buy riskier assets because fewer government bonds are available," the Journal story reported.

From the story:

That said, it "remains to be seen" if the Fed could push yields lower than they already are. But he did say with financial markets having already pushed yields down, Fed actions that help maintain such levels could be "very valuable."

In response to an audience question, Mr. Lockhart said extending further a program most in markets call Operation Twist is "an option on the table" for the Fed. The central bank is slated to end later in the month an effort that saw the institution sell short-dated bonds to buy longer dated securities, in a bid to boost economic activity. Mr. Lockhart noted "there is a capacity to do more" with this sort of effort.

Lockhart also indicated that the problems in Europe could be more detrimental to the U.S. economy than he had previously believed, the story reported.

The WSJ also laid out the options for the Fed in the June 6 story, "Fed considers more action amid new recovery doubts."

According to the story, this is what could happen:

  • Nothing.
  • They could offer more forcefully worded promises to act should the economy begin to lose footing.
  • Operation Twist could be extended until the picture becomes more clear, or they run out of short-dated securities.
  • The Fed could launch a third round of quantitative easing.

Though it's not mentioned in the Journal story, a sterilized bond buying program was talked about a few months ago, that could be an option as well.

It all remains to be seen. Federal Reserve chairman Ben Bernanke is scheduled to give testimony to the U.S. Senate at 10 a.m. on Thursday which could offer more insight.

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