RDQ: NY Fed cheif Dudley set to do another round of Quantitative Easing
RDQ reviewed the recent policy statements by the head of the NY Fed, Bill Dudley, who recently gave a speech suggested he was ready to vote for more bond purchases at the next meeting. By convention, the New York Fed president votes with the Chairman, so it appears we may be closer to a further round of QE than we thought.
RDQ stands in major disagreement with him on many of his points (including the view that inflation is too low and that further bond purchases would not represent monetization of the deficit). The outcome of the meeting may well depend on the views of the undeclared on the costs and benefits of additional QE. A central figure in this battle is likely to be Fed Governor Warsh.
If the Fed does expand its QE program further, we think it will increase investor distrust in the dollar. Gold rose to a new record high of $1,320 an ounce today in the wake of Dudley’s speech.
|Current price for Gold EFT multiply by 10 fir the current price per ounce|
Some highlights of the Fed Governor's speech, via RDQ:
What is particularly worrying to us is suggested the asymmetry of policy responses between the case of inflation being too high and inflation being too low. The current price level is roughly seven times higher than it was in 1965, which was the last period when the U.S. enjoyed de facto price stability (the average CPI inflation rate was 1.3% over the five-years ended 1965 and, in that year, the Fed was worried about inflation being too high and then Fed Chairman Martin was summoned to LBJ’s ranch to be warned about not tightening policy). Today, Dudley suggests that the inflation target could be temporarily raised to compensate for the current undershooting of the target. The Fed has never suggested deliberately undershooting its inflation target because of the prior 45 years of monetary policy mistakes, yet Dudley with a straight face said today:The Dovish Mr Dudley
“One possibility would be to keep track of inflation shortfalls when the federal funds rate is constrained by the zero bound, as is the case today. For example, if inflation in 2011 were a 0.5 percentage point below the Fed’s inflation objective, the Fed might aim to offset this miss by an additional 0.5 percentage point rise in the price level in future years.Is it any wonder that gold continues to make new highs, rising $10 an ounce today, to $1,320 an ounce? We think the price of gold can be viewed as a barometer of trust in the Fed (or lack thereof) and this distrust is rising (seemingly exponentially judging by the chart of gold prices).
In the current environment, such an approach would have some advantages as well as some disadvantages. When there is a large amount of slack in the economy, the Federal Reserve might not easily be able to hit an inflation objective soon. But, the central bank could plausibly promise to make up the difference later on. Indeed, the further the Fed fell behind its inflation objective in the near term, the more inflation would need to increase in order to push the actual path of prices up to the path consistent with price stability over the long run. To the extent this policy was more credible, it might do a better job keeping inflation expectations from falling.”