Fed will likely have the votes to approve of QE2 in November: A look at the politics of the Federal Reserve

The November 3rd FOMC meeting will be a contentious one, but it looks like the votes are there to implement QE2. We think this will be bad for the dollar and bullish for gold and commodities as investors seek hard stores of value. Ultimately, it will lead to a lot of uncertainty in the bond market. Real yields in the bond market have fallen sharply, while expectations of future inflation have risen. If they do go ahead with QE2, this could mean that bonds are fundamentally mispriced and the that Fed is monetizing the debt/deficit.

I thought it would be interesting before the next meeting to go over some of the opinions of those that will be making policy decicisons. 


New York Fed President William Dudley
New York Fed President Dudley’s ultra-dovish speech last week, in which he noted that buying $500 billion worth of bonds could have the equivalent impact of up to a three-quarter point rate cut.

Right now rates are close to zero which leaves little monetary policy options available. This is a classic case of what they call pushing on a string. Once rates are near zero, there is little more that monetary policy can do. Well, Dudley has found a way to push on a string with rates near zero, he can do the equivalent of have negative interest rates by buying up $500 Billion.

Chicago Fed President Charles Evans
Chicago Fed President Charles Evans gave an interview this week to Fed confidante Jon Hilsenrath of The Wall Street Journal. Evan’s interview was every bit as dovish as Dudley’s speech and we think he fundamentally misdiagnoses what is wrong with the U.S. economy. He appears to want shock-and-awe QE and thinks the economy is saving too much. He also appears to be in favor of overrunning the Fed’s inflation target.

Chicago Fed President Charles Evans called for "much more" easing in an interview published by The Wall Street Journal. "In the last several months I've stared at our unemployment forecast and come to the conclusion that it's just not coming down nearly as quickly as it should," Evans said. "This is a far grimmer forecast than we ought to have," he added. As result, he said, he favors "much more [monetary] accommodation than we've put in place."

Kansas City Fed Cheif Thomas Hoenig
In contrast, Kansas City Fed President Tom Hoenig gave a brilliant presentation today on what monetary policy can and cannot do and how too much Fed ease following the 2001 recession resulted in the financial crisis and recession of 2008-2009.  “Tight monetary policy had nothing to do with the unemployment rate of 9.6 percent. It was low interest rates that had a lot to do with it,” Hoenig said. He cited how the Fed lowered interest rates to 1 percent in 2003 and 2004. “I have to tell you it [Quantitiative Easing] horrifies me,” Hoenig said, responding to an audience question. “It assumes you can fine- tune things like interest rates.” On inflation he quipped, “I have never agreed to” an informal inflation target, he said. “Two percent inflation over a generation is a big impact."

Dallas Fed Cheif Richard Fisher
Dallas Fed's Chief Richard Fisher doesn't agree that more QE is going to start us on the path to recovery.  Richard Fisher's opinion is widely respected but he doesn't become a voting member until next year.   

More
 
MarketWatch: Fed Calls for more QE
Hoenig:  High rates didn't cause the recession, low rates did
Fisher:  Monetary Policy is not the solution

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