In case you missed the Fed minutes yesterday, the Fed is now pulling a Wall Street: Cutting its estimates after the stock has already tanked.
The Fed’s “central tendency” forecast for the economy’s growth this year is now 3.0%-3.5% instead of the 3.2%-3.7% from the meeting in April.
Something tells us that at the next meeting those forecasts will be revised down again.
Which brings up the question of new stimulus.
Paul Krugman, Niall Ferguson, and others are now united (!) in their outrage about how Ben Bernanke is fiddling while Rome burns. Based on the minutes of the Fed meeting, it seems this message is getting through:
FOMC members said the committee would “need to consider whether further policy stimulus might become appropriate if the outlook were to worsen appreciably”. (FT)
What will that stimulus look like? The Fed can’t cut interest rates much more, so it will probably be quantitative easing: The Fed buying up debt and, thus, pumping new cash into the system.
More quantitative easing also might actually reverse our slide toward deflation. The reason the traditional Fed medicine, low interest rates, hasn’t triggered inflation (so far) is that no one wants to lend or borrow money anymore. But by directly buying up debt, the Fed will be blowing cash into the system. And, eventually, say the monetarists, that will trigger inflation.
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