Signs of Sanity in the Fed?

The minutes from the most recent December FOMC (Federal Open Market Committee) meeting were made public today, and revealed a potential light at the end of a seemingly endless dark tunnel.  Although more quantitative easing was supported in the meeting (aka QE4-Ever), the minutes unveiled that more than the usual lone dissenter expressed concerns and tepidness towards the additional and continuing monetary expansion policies.

Recall that QE4-Ever essentially comprises the Fed buying approximately $85 billion per month of long-term treasuries and mortgage backed securities until expected inflation is either 2.5% or unemployment falls to 6.5 %.   The Fed currently predicts that these thresholds will not be reached until mid-2015.  This is the first time the Fed has used (or atleast publicly acknowledged) these types of thresholds to determine a monetary policy change.  Because no one knows when (or if) these thresholds will be reached, these monetary expansion policies are viewed as endless, limitless, and ultimately potentially very dangerous to many.  Earlier blog posts found here detail some of the inherent potential dangers of quantitative easings.

Prior quantitative easing policies have been supported by practically all of the FOMC members except one (i.e., Mr. Jeff Lacker).  Some refer to Mr. Lacker as the lone sane member.  However, based on the minutes, it appears that some of Mr. Lacer’s sanity is finally rubbing off to other members.  The following minutes excerpts expose other members’ potential concerns and tepidness towards QE4.  The bolded sections are highlighted for emphasis.

While almost all members thought that the asset purchase program begun in September had been effective and supportive of growth, they also generally saw that the benefits of ongoing purchases were uncertain and that the potential costs could rise as the size of the balance sheet increased. Various members stressed the importance of a continuing assessment of labor market developments and reviews of the program’s efficacy and costs at upcoming FOMC meetings. In considering the outlook for the labor market and the broader economy, a few members expressed the view that ongoing asset purchases would likely be warranted until about the end of 2013, while a few others emphasized the need for considerable policy accommodation but did not state a specific time frame or total for purchases.  Several others thought that it would probably be appropriate to slow or to stop purchases well before the end of 2013, citing concerns about financial stability or the size of the balance sheet.  One member viewed any additional purchases as unwarranted [Mr. Lacker]…

…Mr. Lacker dissented because he objected to the asset purchases and to the characterization of the conditions under which an exceptionally low range for the federal funds rate would remain appropriate. He continued to view asset purchases as unlikely to add to economic growth without unacceptably increasing the risk of future inflation, and to see purchases of MBS as inappropriate credit allocation. With regard to the funds rate, Mr. Lacker was concerned that linking the forward guidance to a specific numerical level of the unemployment rate would inhibit the effectiveness of the Committee’s communications and increase the potential for inflationary policy errors; he preferred qualitative guidance instead…

Even though there still is only one dissenter, it appears that there may be more in the near future…a small glimmer of light at the end of the endless dark tunnel.

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