Thursday, May 31, 2012

The Fed

With all the commotion in Europe, the Fed seems to be keeping a very low profile. Could it be that Fed officials are finally coming to the conclusion that the Fed can’t fix all of our problems? They certainly can’t fix Europe’s problems with our monetary policies.

Besides, now that the latest European crisis has pushed US Treasury bond yields to record lows, what exactly would be the point of another round of quantitative easing? The only point would be to try to push stock prices higher. There certainly has been a strong correlation since early 2009 between rising stock prices and quantitative easing.

Yesterday, Bill Dudley, the president of the FRBNY, offered us an update on the Fed’s latest thinking, suggesting that he and his colleagues are ready to pull the trigger and provide easing if necessary:

(1) “Given our forecast of stable prices and a still slow path back to full employment, there is an argument for easing further. But, unfortunately, our tools have costs associated with them as well as benefits. Thus, we must weigh these costs against the benefits of further action.”

(2) “As long as the U.S. economy continues to grow sufficiently fast to cut into the nation’s unused economic resources at a meaningful pace, I think the benefits from further action are unlikely to exceed the costs. But if the economy were to slow so that we were no longer making material progress toward full employment, the downside risks to growth were to increase sharply, or if deflation risks were to climb materially, then the benefits of further accommodation would increase in my estimation and this could tilt the balance toward additional easing.”

(3) “Under such circumstances, further balance sheet action might be called for. We could choose between further extension of the duration of the Federal Reserve’s existing Treasury portfolio and another large-scale asset purchase program of Treasuries or agency mortgage-backed securities.”

Today's Morning Briefing: Wary and Weary. (1) A weekend on a lake with lots of bears. (2) Other than Europe, all is well. (3) Record low safe-haven yields. (4) A bubble in risk aversion? (5) Still underweighting Europe, while overweighting US. (6) Stay Home vs. Go Global. (7) When dollar peaks, Risk On will be safe again. (8) Europe will recapitalize banks after Greek elections. (9) With US yields near zero, what would be the point of QE3? (10) Bill Dudley is ready to do right by US economy. (More for subscribers.)

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