First Policy Disappointment of the Week

The Federal Reserve offered no additional easing at the conclusion of their two-day meeting, disappointing market participants who increasingly came to expect fresh monetary action.  The Wall Street Journal is trying to keep hope alive:

The U.S. Federal Reserve signaled more strongly it will take new steps as needed to boost the economy, but held back from immediately starting a new round of bond buying or taking other actions on Wednesday.

Fed officials flagged intensifying concerns over the economic outlook and gave a stronger indication they are moving closer to taking further action as they continue to monitor the fragile recovery. A string of disappointing jobs reports, a sharp slowdown in second-quarter growth and a softening in inflation have fanned expectations that the Fed may step in later this year with new stimulus for the economy.

Maybe next meeting, maybe not. I get the sense that the WSJ’s contacts are on the dovish side of late, given the frequent stories that suggest the Fed is about to do more, in contrast to actual Fed inaction.  This dates back to at least the story of “sterilized” QE this spring.  While in the past, I have said to ignore the hawks with regards to monetary policy, now I am thinking you need to ignore the doves as well.  It seems that both camps are caught up in the short-run fluctuations, with the hawks gaining ground on the upswing, and the doves on the downswing, but neither camp can make any traction when year-over-year growth continues to track around 2%:

(click to enlarge)

Of course, one can make the argument that even stable average growth is not enough, and demands more monetary attention.  This seems to be the argument of the doves, although they do not appear to be making it as forcefully inside the Fed as they do in public venues.  But neither hawks or doves matter much at this point.  Federal Reserve Chairman Ben Bernanke is driving this train.  He can bring the middle to the doves if he wanted to.  But he doesn’t want to; he is a center-hawk policymaker.  You get the sense that although Bernanke says the Fed can do more, he really believes what they can do is largely ineffective at this point other than increasing inflation risks.  And if they have any effect, they need to be reserved for a clear economic calamity.

As for September, it is data dependent.  But we need to see some substantially weaker data.  The last six months seems to have proved beyond a shadow of a doubt that the bar to more QE is much higher than could be inferred from the public comments of dovish policymakers.

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