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Fed Minutes Hint At Coming QE


Ignore all the hoopla about the “mid-cycle adjustment” being the dominant theme in the  July 30-31 FOMC minutes, and focus on what matters: the coming QE.

In the minutes, which had no less than six mentions of “asset purchases“, i. e QE, the Fed made it clear that with the S&P not even 5% below all time highs, the FOMC was already contemplating the next round of QE, with “several participants” lamenting that the Fed had not bought up even more Treasurys and MBS (and who knows, maybe stocks) because, get this, QE had not resulted in hyperinflation (yet). No, really:

In particular, a number of participants commented that, as many of the potential costs of the Committee’s asset purchases had failed to materialize, the Federal Reserve might have been able to make use of balance sheet tools even more aggressively over the past decade in providing appropriate levels of accommodation. However, several participants remarked that considerable uncertainties remained about the costs and efficacy of asset purchases, and a couple of participants suggested that, taking account of the uncertainties and the perceived constraints facing policymakers in the years following the recession, the Committee’s decisions on the amount of policy accommodation to provide through asset purchases had been appropriate.

But if that statement is simply ridiculous, the next one will result in a scene right out of scanners. According to the minutes, an unknown number of participants thought that just because they had already conducted QE, they are now experts, and any future cases of QE will be a walk in the park:

In their discussion of policy tools, participants noted that the experience acquired by the Committee with the use of forward guidance and asset purchases has led to an improved understanding of how these tools operate; as a result, the Committee could proceed more confidently and preemptively in using these tools in the future if economic circumstances warranted.

Why would the Fed pivot toward QE? Because everyone else is doing it of course:

Expectations for near-term domestic policy easing had occurred against the backdrop of a global shift toward more accommodative monetary policy. Several central banks had eased policy over the past month and a number of others shifted to an easing bias. Market participants were particularly attentive to a statement after the European Central Bank’s Governing Council meeting that was perceived as affirming expectations for further easing and additional asset purchases. These changes to the policy outlook in the United States and across a number of countries appeared to play an important role in supporting financial conditions and offsetting some of the drag on growth from trade tensions and other risks.

And if that wasn’t scary enough, in the same document there were no less than 15 mentions of ELB (i.e., effective lower bound), which as Fed watchers know, is a code name for NIRP. In other words, Trump should keep up his high-pressure campaign on Powell: it appears to be working.