Monetary policy

QE3 is closer

Last evening, Fed vice chair Janet Yellen made a speech at Boston economic club dinner and she outlined “her own” view of further monetary easing. Two things in her speech strike me:

In speaking of headwinds to U.S. economy recovery, Ms. Yellen listed three factors: 1) Housing sector, 2) U.S. Fiscal policy, and 3) Sluggish pace of growth oversea and global financial market strains.

Second, in her outlook of Fed monetary policy, the Vice Chair said “If (Fed) committee judges that the recovery is proceeding at an insufficient, (Fed) could 1) Extend maturity extension program, and 2) Undertake additional asset purchase”.

The vice chairman layed out “her own” view of QE3 as housing remains the number one risk to U. S. economy recovery. In my notes on March 1 and May 9, I predicted a further QE and the new measures will focus on accelerating housing recovery. I think this is being materialized. Fed Chairman Ben Bernanke, during a testimony on Capitol Hill today, cited significant risks to the U.S. economic recovery but stopped short of signaling Fed action to combat them.

Many people have expected the chairman be explicitly laying out plan for QE3 and that turned out to be a disappointment.

In my view, a testimony is not the best place for the Fed Chairman to express his view on monetary policy. More importantly, further monetary measures are political sensitive issues in the election year. Indeed, the Chairman skillfully deferred his answer when asked whether the Fed is planning to take more measures to boost growth. The Fed members “are still working” on that question ahead of their June 19-20 meeting. It depends on “whether the economy will be strong enough to make material progress on bringing down unemployment”. The prescribed pre-condition is true since the unemployment rate stays as high as 8.2% and improvement in employment has been terrible slow.

In summary, my guess remains unchanged from the prediction in my Notes on March 1 and May 9, more QE is coming. With low inflation risk, Fed has the best time to engineer another QE to improve employment.

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