By Justin Lahart
It should be clear by now that Federal Reserve Chairman Ben Bernanke
wants to do more to boost the economy. He's likely to get his way.
In his Senate testimony Tuesday, he reiterated the Fed's June pledge
to act further if the job market doesn't improve. He cautioned that
the economy is too fragile to withstand the tax increases and spending
reductions coming at the end of the year if Congress doesn't act. And
he said that not only did he see the risk of inflation as low, but
that there was a "modest risk" of deflation.
Given the downbeat tenor of recent economic news--June's decline in
retail sales saw economists cutting gross-domestic-product
estimates--Mr. Bernanke has cover to act. Of the policy options on the
table, a third round of quantitative easing, with the Fed buying both
long-term Treasurys and mortgage-backed securities, seems likeliest.
Not everyone on the Fed's policy-setting committee is keen on QE3.
Minutes from the June meeting, in which the Fed decided to renew the
"Operation Twist" Treasury-buying program, in which it sells holdings
of short-term government debt and uses the proceeds to buy
longer-dated ones, showed members were reticent about taking further
action.
But since then the mood on the committee has become more dour.
Speaking Tuesday, Federal Reserve Bank of Cleveland President Sandra
Pianalto offered an economic forecast that was notably bleaker than an
assessment she gave at the end of May. On Friday, Atlanta Fed
President Dennis Lockhart said that if the economic data don't
improve, his view that QE3 is unnecessary will be "untenable."
Electoral politics pose a potential problem. With long-term rates
already at historic lows, it is hard to claim that it is needed to
make debt even cheaper. The main aim of QE3 likely would be to push
investors into stocks and other risky assets. The trouble is that
artificially juicing a stock market, which is only a few percentage
points off its recent highs, would be controversial for the
independent Fed heading into November's elections.
Nobody really believes the Fed's well-worn protests that it doesn't
weigh politics in its decision-making process. However, if the Fed
thinks it should move but doesn't, it would open itself up to a
different kind of onslaught.
While some Fed members will continue to worry that more QE could carry
as many risks as benefits, the politics of the situation argue that if
the Fed is going to launch QE3, it will do so at its two-day meeting
that concludes Aug. 1.
After all, the last thing Mr. Bernanke wants is for Fed-obsessed
markets to de disappointed, only to force another round of QE even
closer to the election.
Write to Justin Lahart at justin.lahart@wsj.com
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(END) Dow Jones Newswires
July 17, 2012 16:39 ET (20:39 GMT)
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