Officially the Fed has a dual mandate: stable prices and high employment.
In the latest version of his newsletter, James Grant points out that the Fed has a third, unofficial mandate, and that it explains why QE3 is much more likely than people presume right now.
QE3 is the subject at hand, a topic as speculative as it is timely. In preview, we count ourselves among the expectant 30%. To its congressionally directed dual mandate — stable prices and full employment — the Bernanke Fed has unilaterally added a third. It has undertaken to make the markets rise. The Chairman himself has more than once taken credit for the post-2008 bull market (on one such occasion in January, he reminded the CNBC audience how far the Russell 2000 had come under Fed ministrations. Could he therefore stand idely by in the face of a new bear market? Byron Wien, vice chairman of Blackstone Advisory Services, went on record the other day predicting a summer swoon in stocks following the scheduled winding down of QE2 in June.
Let us say that Wien is right, and that furthermore, dropping stocks are accompanied by sagging house prices and a weakening labour market. Bernanke was hard put to explain why he let Lehman go while acting to save Bear Stearns. He would be harder put to explain why he chose to implement QE1 and QE2 but, in another hour of need, refused to launch QE3.