I always believed it was a matter of time before the US Fed (and probably the UK’s Bank of England) dusted off its voluminous cheque books and engaged in further bout of Quantitative Easing (QE) by writing gargantuan cheques pumping more money into ailing economies. Last week’s statement from the Fed’s monetary committee saying it “is prepared to provide additional accommodation if needed to support the economic recovery” suggests that time is close by.
To be sure, this isn’t the first time the Fed has said it is ready. The Chairman Ben Bernanke prepared the ground at the end of August. At the central bankers’ get-together in Jackson Hole, he said “the FOMC will do all that it can to ensure the continuation of the economic recovery. Should further action prove necessary policy options are available to provide additional stimulus.”
Initially both the statements look blindingly obvious; a bit like firemen saying, “if there’s a fire we will use the hoses AND water to put it out.” But in central-banker-speak these comments go further than merely telling us they have a plan. Here we are being warned ‘There is a fire. We have plugged in the hoses. We are ready to turn on the tap.’ So The question is what will cause them to take action?
The Fed and Dr. Bernanke have already given some pretty big hints and set out the ground rules. At its 10th August meeting the FOMC said it would consider more stimulus “if the outlook were to weaken appreciably further.” A few weeks later, at Jackson Hole, Bernanke used the phrase “if the outlook were to deteriorate significantly.” So, has the US economy “weakened appreciably” or “deteriorated significantly?” That is the crucial question.
Looking at the latest economic data, an argument can be made either way. For instance, Friday’s Durable goods numbers showed the strongest rise in five months, yet the headline number still fell because of weak transportation data. Corporate spending is still up. Corporate profits remain high. But – and this is probably the most telling number – unemployment remains stubborn at 9.6 percent and last week’s US weekly jobless claims data continued to rise, disturbingly so for this stage of the recovery.
While it is true in the aftermath of every recession there are periods when the steam goes out of the recovery, the causes of the Great Recession make this especially relevant . Bernanke said in a speech on Friday that recoveries from financial crises tend to be more sluggish than normal, cyclical recessions. He concluded that this time, because of the enormous amount of fed and government action, “we are hopeful to get a better result”. So far it seems he is out of luck!
In deciding when to turn on the QE tap, the Fed also probably had politics on its mind (although, they would never admit that, heaven forbid!) The closer the date to the congressional midterm elections, the less likely that any real movement would be made. So, the decision of the FOMC to telegraph their intent last week was politically astute. This was its last meeting before the voting on November 2nd. If the polls and pundits are right, Obama’s democrats are expected to do badly and lose seats in the House, possibly losing control. Any dramatic action by the fed, such as reintroducing QE would have been pounced on by Republicans as evidence that Obama’s economic policy had failed.
So cleverly, the Fed told the markets that they were getting ready but at the same time they didn’t give the politicians a brick with which to beat each other senseless.
Ironically, the next FOMC result will be announced on November 3rd, 24 hours after the midterm polls have closed when no questions of political ingenuity will needed. My guess is either then, or in December, the Fed will turn on the taps again. Get your umbrella ready, QE is about to rain down.
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Richard Quest is a CNN correspondent based in London, host of the weekday one-hour program “Quest Means Business”. For program highlights and more, go to www.cnn.com/qmb