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QE3 is Imminent According to Fed Minutes

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The dollar resumed its slide against all of the major currencies following the release of the August FOMC minutes. The pessimistic tone of the minutes made it clear that policymakers are warming to the idea of more QE. The Fed had actually decided to extend the September meeting from 1 day to 2 days when they last met but Bernanke chose to share that information at Jackson Hole - talk about managing expectations! Considering that a few members sought stronger action and central bank officials openly discussed different ways to stimulate the economy, most Fed officials want more stimulus, but just need more time to weigh the cost and benefits of each policy tool. In particular, options discussed include additional asset purchases, maturity shift and reducing the rate on reserves. At this point, it is not a matter of if, but a matter of when QE3 will be announced. If non-farm payrolls rise by less than 75k on Friday, the Fed cannot afford to wait any longer and will most certainly take additional steps to stimulate the economy in September. In fact, a few Fed officials were ready to press the go button on a more substantial move this month.

With inflation expected to fall over time, the economy vulnerable to adverse shocks, and an increased degree of uncertainty on economic growth, Fed officials have become more willing to increase stimulus. Their pessimism has even forced the central bank to reduce their estimate on potential growth. Unfortunately there have been little improvements in the economy since then which is why the desire for stimulus has probably increased. But don't expect the decision to be unanimous. The latest comments from U.S. policymakers suggests that they are still divided on the future of Fed policy. There is no argument that monetary policy needs to remain easy and the need for more stimulus has increased, but decisively dovish comments from FOMC voter Evans was met with more moderate comments from voter Kocherlakota. Considering that Kocherlakota was one of the dissenters at this month's FOMC meeting, his more moderate view suggests that the deterioration in the U.S. economy has not swayed his decision. Kocherlakota argued that "the unemployment rate is now lower than when the Fed started QE2 in Nov. 2010 and at the same time, core PCE inflation is running more rapid." As a result, there is no need to "ease further if you're doing better on your mandates." Unfortunately Kocherlakota may still have those rose colored glasses on because even though the unemployment rate is lower, he is ignoring the fact that the jobless rate is back above 9 percent. Thankfully the majority does not share his views.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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