More Dovish Fed Lowers QE Bar
The Federal Reserve's policy committee has a more dovish mix of members in 2012, lowering the bar for further monetary easing if the U.S. economy stumbles again.
More hawks rotated out of the Federal Open Market Committee than rotated in. The result is a group that's slightly more sympathetic to taking extreme measures to promote growth.
To be sure, Chairman Ben Bernanke still calls the shots. But as political hostility grows toward the central bank, he could benefit from less internal dissent.
"It cements the consensus," said Doug Roberts, chief investment strategist for Channel Capital Research. "It opens the way for them to do something.
The FOMC is made up of seven governors (including the Fed chairman and vice chairman), the New York Fed president, and four of the 11 other regional Fed presidents who take turns serving one-year terms. Governors tend to vote with the chief, while any dissent tends to come from the regional heads.
Those off the FOMC are the dovish Charles Evans of Chicago and the hawkish Richard Fisher of Dallas, Narayana Kocherlakota of Minneapolis, and Charles Plosser of Philadelphia.
Taking their places are hawk Jeffrey Lacker of Richmond, Va., doves John Williams of San Francisco and Sandra Pianalto of Cleveland, and the more cautious Dennis Lockhart of Atlanta.
President Obama also has named a Republican and a Democrat to fill vacancies on the board of governors, potentially bringing to six the new faces on the 12-member panel.
They will debate what, if anything, is left to do.
Interest rates can't get lower, and the Fed has bought more than $2 trillion in Treasuries and mort gage-backed bonds in two rounds of quantitative easing. QE, especially QE2, lifted stock, commodity and bond prices, but had a more limited impact on the overall economy.
Some Fed officials have talked about additional support for housing, perhaps via more mortgage-related securities.
But Lacker told CNBC on Wednesday that Fed purchases of private assets amount to fiscal policy and threaten the central bank's independence.
Lockhart said in a separate event that he's inclined to stay the course but remains open to additional action. He also said housing may not have bottomed yet.
Former Fed Gov. Mark Olson doesn't expect new policy initiatives this year, saying recent positive data remove pressure for more action. Remaining options would have little effect anyway, he adds. "Additional QE is an absolute long shot," he told IBD.
What is certain is that the Fed will issue formal, regular rate forecasts for the first time after its Jan. 24-25 meeting. All 17 voting and nonvoting members will give their own predictions.
Olson sees the forecasts being more about disclosure than stimulus through expectations.
But if the forecasts signal that near-zero rates will continue well beyond mid-'13 — as the Fed pledged last year — it could offer greater certainty and encourage more investment, Roberts said.
On Jan. 5, St. Louis Fed President James Bullard told Bloomberg Radio that the Fed is "very close" to an inflation target and hinted at an unemployment target.
Managing expectations carries less political risk than printing money and can still lift the economy, said John Canally, an economist at LPL Financial.
The Fed is relatively bullish on 2012, predicting 2.5%-2.9% U.S. GDP growth. But private economists expect just 2%, as a European recession and slower Asian growth weigh on the U.S. Anything below 2% might spur Bernanke to act, Canally predicted.
"I expect him to continue to walk the tightrope," he said.
