In a recent blog post found here, I warned that more monetary accommodations by the Fed (e.g., “QE3”, “Operation Twist”) may be coming soon. Most economic indicators that the Fed follows to determine its monetary policies either stayed the same or got worse since this last June post. The Fed had its most recent meeting to decide its next moves on July 31 and August 1, 2012. The minutes of this meeting were just released earlier this week. In sum, most board members want additional monetary action “fairly soon” to boost the economy. According to the minutes:
Many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery.
Currently there are no reputable person(s) nor any data suggesting “substantial and sustainable strengthening in the pace of the economic recovery.” Thus, it appears my June “insanity” warning signal just got much louder.
The minutes indicate that the following are two monetary accommodations the Fed is considering:
- Pledging to maintain interest rates at practically zero past its initial unprecedented pledge of through atleast 2014. This is thought to bring more certainty to the markets and encourage investors to invest in stocks and other higher yield investments spurring economic growth. However, the pledge to maintain these historically low rates through 2014 some time ago has done little, if anything, to spur the economy. Why would we expect a different result this time…?
- Executing a third round of quantitative easing (aka QE3) – recall that theoretically this pumps money into the economy by Fed buying government bonds with new printed money to increase the money supply and the reserves within the banking system. This purchasing raises the prices of the Treasury instruments bought, which in turn lowers the yield. However, QE has been executed twice since 2008 and little economic growth has results. Again, why would we expect a different result this time…?
On one small upside, there was at least one member that appeared rational. Unfortunately, it was just one. According to the minutes:
One member judged that additional accommodation would likely not be effective in improving the Federal Open Market Committee economic outlook and viewed the potential costs associated with such action as unacceptably high.