Minutes from the Federal Reseve’s July 31-August 1st meeting that were released yesterday signaled an increased willingness from Fed members to engage in a new round of bond buying or asset purchases, known as quantitative easing, to help stimulate the U.S. economy.
The minutes suggest a greater readiness to engage in quantitative easing, perhaps as early as September.
However, the motivation to move in the direction of more easing occurred at a time when a batch of U.S. economic data from July pointed to a weaker economic climate across the U.S., causing more alarm and widespread support for the need of stimulus measures.
The June jobs report only showed gains of 80,000 new jobs when the minutes were drafted compared to 163,00 jobs added in July.
The tenor of U.S. economic data has steadily brightened throughout the month of August in a variety of areas such as retail spending, consumer confidence, and housing.
Still, despite the good economic news, the U.S. unemployment level crept up to 8.3% in July from 8.2% in June.
In the past, Fed Chairman Bernanke said that he stood ready to act for more stimulus as a last resort if the economy deteriorated or worsened.
Economists are now left questioning whether the Fed Chairman is still feeling motivated to add quantitative easing measures after digesting the improved economic data points in August.
Is more stimulus needed when the U.S. economy is showing signs of improvement and progress?
The Fed Chairman has pointed out in earlier meetings that “strains in global financial markets continue to pose significant downside risks to the economic outlook.”
Uncertainty over the economic outlook in Europe and the economic slowdown in Asia both have the potential to cause further risks to the U.S. economy in the future.
The widely reported U.S. “fiscal cliff” is also inching closer to realization after the November elections.
Many investors and traders are waiting to discover if the Fed Reserve will decide to act soon in September by starting quantitative easing (QE3) early and backstopping future economic risks in advance.
The other possibility that remains an option for the Fed Reserve includes waiting for more economic data points while “keeping their powder dry” before jump starting more quantitative easing after the risks become even more palpable and gain traction.
The U.S. stock market rally over the past couple of months was partly fueled by speculation that the Federal Reserve would continue with more quantitative easing in 2012.
More clues about further easing could be announced on August 31st when Fed Chairman Bernanke will give a speech at an annual economic conference in Jackson Hole, Wyoming.
The Fed has already pumped nearly $2.1 trillion into the U.S. economy through the first two quantitative easing programs.
In September 2011, the Fed announced plans to lower long term interest rates through an operation called “Operation Twist,’’ whereby the Fed purchases $400 billion in long-term Treasury securities from the sale of short-term government debt.
In June 2012, the Fed decided to extend “Operation Twist” for six more months through the end of 2012 by purchasing $267 billion in long term securities.