On Friday afternoon, one of the undecided FOMC members, Atlanta Fed President Dennis Lockhart appeared to move closer to voting for QE3 now. Back in June, Lockhart said he viewed the current “policy stance as appropriate”. But, based on incoming data, his views are changing.
From Lockhart on Friday: The Debate Over Further Monetary Action. Excerpt:
The question that the members of the FOMC confront is whether there is more that can be done to address the related challenges of slower GDP growth and tepid job creation. So, to wind up, let me give you my take on the key questions underlying a decision to bring on more monetary stimulus.
I think the output gap—the amount of slack in the economy—is neither as sizeable as the high-end estimates, nor is it zero. … I do not think a compelling case has yet been made that structural adjustment has played a dominant role in slowing growth and progress against unemployment.
On the risk associated with the balance sheet: in my judgment, some further use of the balance sheet to promote continued recovery and/or financial stability brings with it manageable risks. I think reversal of the cumulative balance sheet scale and maturity structure can be accomplished in an orderly manner. But the step of additional balance sheet expansion should be undertaken very judiciously. Such a step would take us further into uncharted territory.
On the likely effectiveness of further monetary stimulus—a policy that would necessarily be brought to bear at least in part through credit channels—I think we should have modest expectations about what further action can accomplish. I do not think this means monetary policy is impotent or has reached its limit. But I don’t see more quantitative easing or similar policy action as a miracle cure, especially absent fixes in policy areas outside the central bank’s purview.
So, as one policymaker, here’s my situation: my support for the current stance of policy rests on a forecast that sees a step-up of output and employment growth by year-end and into 2013. If the economy continues on the track indicated by the most recent incoming data and information, that forecast will become untenable, as will the policy premises underlying it.
Although Lockhart weighed both sides of each issue in his speech, he concludes: 1) the risks of QE3 are “manageable”, 2) QE3 will be modestly effective, and 3) his earlier forecast is becoming “untenable” and that means he will support more accommodation if the recent weak data continues.
Next up will be Fed Chairman Ben Bernanke’s Semiannual Monetary Policy Report to the Congress on Tuesday and Wednesday. QE3 is coming. It is just a question of when.