The employment situation is still on the rocks as approximately 9.5% of the labor force is still out of work. At the same time, inflation remains weak and as stubborn as Pipcrawler when it comes to taking baths! Sure, you can argue that the economy has been growing. But at the rate it’s going, it’s something to be worried about rather than to be proud of.
The Fed has already done a lot in attempt to breathe life into the economy. It lowered interest rates to near zero levels and promised to keep them accommodatingly low. It even purchased trillions of dollars of securities to bring more money into circulation. But as the US’s economic picture remains gloomy, the Fed is beginning to believe more quantitative easing is needed.
The only problem is, further quantitative easing (QE) would bloat the Fed’s balance sheet even more. So what’s a central bank to do?!
On the one hand, if they choose to engage in QE quickly, it could cause a major upsurge in inflation, which would stifle economic growth. On the other hand, if they choose to maintain its wait-and-see stance, the US economy could run the risk of falling into a deflationary spiral. Which will it be, Mr. Ben Shalom Bernanke?
It is clear that the Fed members share the same goal – they want to get economic recovery running at a decent pace, but hold off on too much support. According to the most recent monetary policy meeting, it seems that the Fed head is having a tough time making a decision since his subordinates are divided on the issue.
In the blue corner, we have William Dudley, Eric Rosengren, and Janet Yellen… New York, San Francisco, and Boston represent! They believe that more stimulus policies are necessary because the US continues to suffer from low employment and weak inflation. The 9.5% jobless rate is almost twice as much as the Fed’s target of 5% unemployment while inflation, which stands at roughly 1%, needs a kick to land back in the Fed’s target range of 1.5% to 2%.
In the red corner, we have Fed governors Kevin Warsh, Daisy (oops, I meant Betsy) Duke, Philadelphia Fed President Charles Plosser, and all-time dissenter Thomas Hoenig. They argue that the US doesn’t need more stimulus from the Fed. Enough is enough, they say. According to them, the latest easing move by the Fed might just confuse investors into thinking that the central bank is extremely worried about the US economy.
It was a tough choice, but as you all know by now, the meeting ended with a 9-1 vote in favor of further QE. For now, the decision’s long-term effect on the dollar is unclear, but something tells me it wouldn’t be the same as in 2009. Unlike last year, this second round of QE could be done in small doses, depending on the outlook of the US economy.