As it turns out, the Fed may not be as dovish as we had once believed. In fact, there are a few FOMC members out there that want to call off the Fed’s open-ended stimulus program by the end of the year. Hah! How ironic that people once dubbed it “QE4ever!”
Prior to the release of the December meeting minutes, the Fed had seemed to suggest that it would continue to support a highly accommodative policy. If you recall, it announced just last month that it will be shifting its stance from a time-based approach to one that is outcome-based.
Instead of leaving Fed fund rates at near-zero levels until 2015 as it had promised before, the central bank decided that it will keep rates at these levels for as long as the unemployment rate remains above 6.5% and the inflation rate stays below its 2.5% target.
This was a major adjustment for the Fed, but more importantly, it was one that the markets deemed very dovish. So you can imagine how surprised they all were to hear that “several” members want quantitative easing to end this year. That’s right, it looks like FOMC member Jeffrey Lacker finally found someone to join him in the anti-QE camp!
Now, what does this all mean? Are some members actually considering withdrawing stimulus because they think the economy doesn’t need it?
Not quite, if you ask me. From the details of the minutes, we can see that what drove the anti-QE members to call for an end to stimulus wasn’t their confidence in the economy… I mean, come on, they aren’t blind! It’s clear that the U.S. still isn’t out of the woods. However, it appears that they voted to halt QE4ever because they believe that increasing asset purchases might not be such a worthwhile approach anymore.
In fact, not only was the effectiveness of QE put to question, but the potential costs of further increasing asset purchases were also raised as a major concern. After all, the U.S. risks inflating its balance sheet and causing financial instability if it keeps pumping money into the economy. This suggests that the Fed may have to seek other options and get creative if it wants to implement new measures to lift the economy.
As for its implications on the dollar, from the looks of it, this development could help the safe haven currency recoup some of its recent losses. If Fed members continue to show that their having second thoughts about continuing QE4ever past 2013, it might just snuff the markets’ recent risk rally, which has been fueled in part by expectations of continuous easing from the central bank.