The Federal Open Market Committee (FOMC) won’t meet until later this month to discuss what was supposed to be the end of quantitative easing, but in an interview with Bloomberg St. Louis Federal Reserve Bank (Fed) President James Bullard said that it may be too early to pull the plug. His comments caused US equity markets to rebound after a week-long correction erased essentially of the year’s gains.
“Inflation expectations are declining in the U.S.,” Bullard said. “That’s an important consideration for a central bank. And for that reason I think that a logical policy response at this juncture may be to delay the end of the QE.”
Falling into the Fed’s QE trap?
According to Bullard, “US macro fundamentals remain strong,” and he still expects to end QE this year with a rate hike in toward the beginning of next year, but he thinks it might be safer to wait a month and see what happens.
That may seem perfectly reasonable, considering how deep we’ve gone with QE already another $15 billion won’t be what makes or breaks the policy. The problem, as Fed critics have been saying for a while now, is that we are in danger of falling into a QE trap. If ending monetary accommodation means going through a period of financial pain, and the Fed is unwilling to let the markets fall a bit, then we could end up with an open-ended QE program that oscillates but never really ends.
If that sounds far-fetched, Bullard repeatedly says that QE should be an open-ended program. His suggestion to stop numbering the QE’s speaks volumes.
Inflation expectations conflict with Bullard’s forecast
Another major criticism of the Fed is that it doesn’t seem to appreciate, or at least like to acknowledge, that monetary policy is way out in uncharted territory. So when Bullard says that “my forecast is for rising inflation, that’s why I’m concerned about declining inflation expectations,” it doesn’t give Fed critics much confidence that central bankers know where they’re actually steering us.
Federal Reserve Bank presidents serve on the FOMC in rotating one-year terms (with the exception of the New York FRB president, who has a permanent seat), and while Bullard isn’t a voting member this year he’ll still take part in the October 28-29 meeting, his opinion still carries weight. If the voting members agree, then the Yellen Put is still on.