Folks have said for weeks that it’s time for the Fed to make its move. That move might be just days away.
In a meeting on Wednesday, Federal Reserve officials spoke with “increased urgency” about the need for more assistance with the struggling economy. Most all members agreed help is needed now and anything less than a complete economic recovery would prevent the government from giving that struggling economy a much needed jolt. But at what cost?
Specifically, Federal Reserve officials voiced their near readiness to “launch a new bond buying program” and that could happen as soon as their next meeting in September. The goal is the same as it’s been during these tough financial months: lower long-term interest rates to encourage more borrowing and spending. Some, however, say that’s the last thing that’s needed, and they cite fears for the fiscal cliff that’s slated for January 1 2013 unless Congress intervenes. Unfortunately, despite talk of a new buying program, that’s about as far as the policy meeting notes that were released on Wednesday revealed. There’s even disagreement on what was “between the lines” with some analysts saying it means more bond buying and others saying it’s anything but.
Remember, the Fed has already taken huge steps in its goal to drive down long-term rates by buying more than $2 trillion (that’s “trillion” with a t) in Treasury bonds and mortgage-backed securities in two previous rounds of bond purchases. The purchases are called “quantitative easing.” David Jones, the chief economist at DJM Advisors stated he believes the likelihood of further easing similar to what’s already been done had
risen from evenly split to as high as a 70 percent chance that the Fed will make that move when it meets Sept. 12-13.
He goes on to say,
I believe the Fed is signaling in very clear terms that a third round of bond purchases will be approved at the September meeting.
Chief U.S. Economist at Capital Economics Paul Ashworth agrees that the modest improvements some say the economy has seen in recent months is hardly enough and that the “Fed won’t be satisfied”. He goes on to say, “Quantitative easing is still very much on the table,” Ashworth said.
Also revealed in those minutes is the belief by some officials that pushing the timetable for any increase in record-low short-term rates beyond the Fed’s current target of late 2014 at the earliest. There are more than a few who insist the target will be extended by up to a year. Remember, in late 2010, the Fed committed to buying up to $600 billion of long-term government bonds by the middle of 2011. The goal then was to drive down mortgage rates and others. This news came not long after the announcement that it would be making up to $300 billion in purchases by reinvesting proceeds into mortgage portfolios.
For its part, Wall Street was rather quiet on the subject; positive, but otherwise quiet. The S&P finished flat after stumbling throughout the trading day while gold rose. This is a sign some insist is proof the Fed will soon be pouring more cash into the economy.
It’s also to keep in mind that while we’ve just now seen the minutes from the latest meeting, they’re also three weeks old since that’s the timetable the government agency says is safer for the country. Following its September meeting, Fed policymakers will also update their economic forecasts, and Chairman Ben Bernanke will hold a news conference.
Ashworth and some other economists said the minutes suggested that if the Fed does launch a new bond buying program, it won’t set a target amount, as it has in the past. Rather, the Fed could keep a new program open-ended so it could continue to buy bonds until it saw a significant decline in the unemployment rate, now at 8.3 percent.
An open-ended bond-buying program would represent a major shift in Fed policy, noted Michael Gapen, an economist at Barclays. Even if the Fed announces another round of bond purchases, some economists have questioned how much it might help. They note that mortgage rates and other key borrowing rates are already near record lows.
In August, there was some surprise when the Fed announced no changes in its policies. But in a statement afterward, it appeared to suggest an open mind in changes to “boost the economy if it doesn’t improve”. It also made mention that growth had slowed in the first half of the year. In particular, it pointed to lackluster job growth and consumer spending.
The issue of whether the Fed will announce any major moves in September was thrown into some doubt by economic improvements since its last meeting. Gains have been made in such areas as hiring, housing and consumer spending.
Many analysts are looking to a speech by Bernanke on Aug. 31 at an annual Fed conference in Jackson Hole, Wyoming. They say this is sure to provide further guidance on any new actions.