FOMC Split on Need for New Financial Stimulus

Written by: Scott Sery

The Federal Open Market Committee (FOMC) released the minutes from their June meeting, and the overall picture of the economy looks rather static.  The fed is split on whether or not another stimulus is in order (QE3), and they are split on whether or not the current actions are having the desired impact.

Quantitative Easing, which most people know as a financial stimulus package, is a method for the Fed to encourage growth in the economy.  Since the start of the great recession the US economy has seen 2 stimulus packages.  QE3 is an option that the fed is discussing in order to encourage job growth.  During the June meeting the Fed talked about encouraging job growth with QE3, however, it was not seen as important at the time.  Between the time of the meeting near the end of June and the time the minutes were released, the employment situation has not gotten better.  This may spur the Fed to talk more seriously about another stimulus at their next meeting.

A big cause in the split decision on whether or not QE3 was necessary is that some feel another financial stimulus will lead to increased inflation.  Currently inflation is holding at a level that the Fed feels is sustainable; they are aiming for 2% for the year 2012.  Another stimulus would drive more money into the economy and could see that number rise.  However, if deflation looks imminent the stimulus could ward it off.

The Fed reinforced the decision to keep Operation Twist going.  They cited they wanted to continue to “put downward pressure on longer-term interest rates.”  This led to criticism that the program is not having the desired results, and there is no reason to keep it going.  The fact that the prime rate would remain near zero through the end of 2014 was also reinforced.

After the minutes were released stocks dropped sharply.  However, during the final hours of trading much of the drop was recovered.  Unfortunately, the FOMC was not able to give a very clear picture of what the near future of the economy will look like.  They revised their outlook for GDP growth down and indicated that it would most likely not truly recover until into 2014.  Investors will have to wait until the next FOMC meeting, which will be held on 8/1 to know more if the Fed will start putting QE3 into place.  After that meeting Chairman Bernanke will hold a press conference where their decision on another stimulus will likely be the key topic.


FOMC Split on Need for New Financial Stimulus

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