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Although the FOMC minutes gave no new signal about policy, at this point markets have gotten the idea that more Fed action is coming as soon as September.Whether or not it’s a good idea is more controversial.
Goldman argues that QE3 is coming AND it’s a good thing in a note out today (via FT Alphaville).
Q: Will Fed officials ease monetary policy further?
A: Yes, we think so. At this point, we believe that the majority of the FOMC expects real GDP growth of around 2.5% in the second half of 2011, and perhaps 3% in 2012. As a result of growth that averages a bit above trend through the end of next year, the committee “…anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate.” Our own expectation is that real GDP growth will average nearly 1 percentage point below the committee’s likely forecast and that the unemployment rate will go sideways to slightly higher. If we are right and the committee ultimately reduces its growth and employment forecast accordingly, we think that this shift in view will be accompanied by further monetary easing.
Q: Should Fed officials ease monetary policy further?
A: Yes, we think so.
There are two main arguments against further easing, but we don’t find them very compelling. The first is that “QE2 didn’t work, so why should QE3 be any better?” We disagree with the view that QE2 didn’t work. It is true that QE2 failed to ignite a more powerful recovery. However, we would attribute this to the combination of an even more adverse “baseline” pace of growth than we (and the Fed) had expected, and to the increase in oil prices. Moreover, our commodity strategists believe that most of the increase in oil prices was due to the tightening demand/supply situation in the oil market, exacerbated by the turmoil in the Middle East. Our belief that the moves in oil prices have been mainly driven by supply and demand rather than monetary policy is also consistent with the easing in oil prices over the past few weeks–a period in which the economic indicators have deteriorated and expectations of QE3 have grown.
The second argument against further easing is that most of the problems in the economy are not easily addressed by monetary policy but require either fiscal solutions or simply time. We agree that monetary policy is unlikely to be very powerful, but we do think that it would add a few tenths to GDP growth and would not have significant costs in terms of inflation given the large amount of slack in the economy (see “How Much Growth Boost to Expect from QE3?” US Daily, August 24, 2011). Ultimately, the question whether to ease is a cost-benefit calculation, and the benefits exceed the costs in our view.