financialsense.com / By Tim Duy / February 21, 2013
The Fed’s commitment to open-ended quantitative easing is more fragile than believed. That is my first takeaway from the minutes of the January FOMC meeting. My second takeaway follows from the first: If the Fed is already wavering on the pace of quantitative easing, can it be long before they waver on their commitment to low rates as well?
Step back to the statement from the January meeting. A central part of that statement was this sentence:
If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until such improvement is achieved in a context of price stability.
What exactly is “substantially”? We don’t really know, but I would be hard-pressed to claim that the labor market has improved substantially. Improved, yes. Substantially, no. And the Fed seemed to agree. From the minutes:
In their comments on labor market developments, participants viewed the decline in the unemployment rate from the third quarter to the fourth and the continued moderate gains in payroll employment as consistent with a gradually improving job market. However, the unemployment rate remained well above estimates of its longer-run normal level, and other indicators, such as the share of long-term unemployed and the number of people working part time for economic reasons, suggested that the recovery in the labor market was far from complete.
And I don’t think the subsequently released employment report would have altered this view substantially (there’s that word again!), so there should be no reason to worry about changing the pace of asset purchases. But maybe instead we should focus on the next line in the FOMC statement:
In determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases.
One would have thought the cost/benefit analysis had been completed when the Fed adopted open-ended QE and then followed by converting Operation Twist into additional QE. But apparently not. The cost/benefit line is the Fed’s get-out-of-jail-free card; it allows them to unwind QE regardless of the progress in the labor market. And this shows up in the minutes.