The Only Reason We May Never See A QE3

deficit hawk

QE2 has begun and naturally everyone is already talking about QE3 and QE4 (se: Roubini).

If you think the future of the US will be Japan-like, this is a reasonable bet.

But there’s one reason QE3 won’t be so easy to come by.

The FOMC is about to turn hawkish as Mike O’Rourke of BTIG explains:

A few weeks ago, we speculated that one of the reasons the FOMC might want to get this policy underway quickly was the rotation of the Regional Bank Presidents.  Come January, three doves (Bullard, Pianalto, and Rosengren) and one hawk (Hoenig) will be replaced by three hawks (Fisher, Kocherlakota, and Plosser) and one dove (Evans).  The incoming hawks have spoken as aggressively as one can against QE without being disrespectful of Chairman Bernanke.  In extending the policy announced today through the first half of 2011, the FOMC has likely pre-empted what would have been some very contentious policy votes.  The meeting and the debate will still be contentious, but the policy is already in place.  Regardless, even with the new composition of the FOMC, the doves will continue to dominate.  For the hawks, their options are  simply limited to how much commotion they make as they are steamrolled.

Before the end of Q1 2011 rolls around, we suspect the talk about the exit strategy will start once again, especially in the next Congress with a new crop of Republicans.  Chairman Bernanke’s future Congressional testimony will be interesting.  Republicans have not been a fan of the Fed Chairman, and this certainly will not endear him.  We can envision it now – Ron Paul badgering Chairman Bernanke in the House, and his son Rand doing the same in the Senate.  In a post-TARP world, that is as exciting as C-SPAN gets.  In a nod to the political aspect of this decision, the Fed Chairman penned an Op/Ed for the Washington Post to explain the move in tomorrow’s paper.

The Fed could probably get another round of QE passed with the hawks on board, but it will be a way more fractured vote, definitely threatening the bank’s credibility.

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