The Lookout4 reasons the Fed won’t go beyond $600 billion in asset buys
What a difference two months makes...
When the Federal Reserve in early November announced its plan to buy $600 billion worth of Treasury bonds in a bid to jolt the economy, it went out of its way to leave the door open to additional purchases down the road.
"The committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed," it said at the time.
But it now looks increasingly unlikely that those additional buys will happen. Ed Friedman, a senior economist at Moody's Analytics, told The Lookout he thinks the Fed won't go above the $600 billion figure -- a view that's in sync with that of the majority of economists questioned in a survey released last week.
What's changed? Four things:
1. There are indications the economy is improving. The stock market and capital expenditures are both on an upswing, and new jobless claims are falling. These hopeful signs may well lead the Fed to decide there's less need for an additional boost -- and more reason to be concerned about future inflation. "They're seeing signs that the economy is picking up steam a little bit," Ann Owen, a former Fed economist who now teaches at Hamilton College, told The Lookout. "At some point they're gonna have to be concerned about price stability."
2. After the Fed acted in November, chairman Ben Bernanke (pictured) called on Congress to enact its own stimulus, saying the Fed couldn't rescue the economy alone. Now, with last month's tax cut deal, it has done so. As Friedman noted, Moody's has predicted the deal will add as much as a full percentage point to economic growth next year. That, too, may well lead the Fed to conclude there's less need to offer additional stimulus by extending the purchases.
3. The Fed's announcement of its asset-buying program, known as QE2, triggered a backlash from some conservatives, far beyond what the central bank appeared to expect. Citing concerns about potential inflation, Sarah Palin told Bernanke to "cease and desist" with the program, while some Republican lawmakers raised the idea of changing the Fed's mandate so that it would focus only on controlling prices, and no longer on boosting employment. Adding to the pressure, Rep. Ron Paul, the Texas Republican who is a longtime critic of monetary policy and has called for the Fed's abolition, is set to take over a key panel that oversees the central bank. Some observers think this hostile climate could have an impact on Fed policy. "Although the Fed is supposed to be independent, they are affected by Congress and Congress threatening to change their authority," said Owen. "I think it makes their job more difficult," she continued -- though she added that she expects the Fed to ultimately take the steps it believes are needed to help the economy.
4. The composition of the Fed's voting bloc will change in 2011 -- and the shift looks likely to tilt the scales slightly toward inflation hawks, at the expense of those who worry more about fighting unemployment.
Some observers think the Fed would be making a big mistake by calling it quits at $600 billion. New York Times columnist Paul Krugman argues that the economy is in such a deep hole that even solid economic growth won't have much impact on the unemployment rate, and therefore that the economy needs all the help -- both fiscal and monetary -- it can get. Indeed, the Fed itself has said it expects unemployment to still be at 9 percent by the end of this year.
Nor is there much evidence that inflation, which remains lows, is likely to be a problem in the foreseeable future.
Nouriel Roubini, the NYU economist who was one of the few to predict the global financial crisis, appears to agree. He said recently that he thinks the economy may need another round of asset purchases, but that politics could prevent it from happening.
"We may need QE3, but then the politics from Congress and the internal dynamic of the [Fed] may not allow it, even if now growth is still below trend and inflation is still low and falling," Roubini told a Bloomberg Television interviewer.
Still, rightly or wrongly, it's looking increasingly likely that, thanks to a confluence of factors, the Fed's efforts to kick-start the economy won't go beyond what it's already announced.
(Photo of Bernanke: AP/Dennis Cook)
