The Fed: Is QE3 Coming in January?
Halbert Wealth Management
By Gary D. Halbert
December 5, 2011
For most of this year, rumors have continually swirled that the Fed was about to embark on yet a third round of Quantitative Easing, or QE3. The rumors suggested, and still do, that the Fed would announce another $600 billion in asset purchases, primarily of long-dated Treasury bonds. Again, these rumors have been out there for months.
While many of us argue that the first two rounds of Quantitative Easing have had little positive effect on the economy, the Obama administration and many politicos on the left are urging the Fed to do more. The argument is that Europe is heading into a recession, and this can’t help but weaken the US economy just ahead. So what’s holding the Fed back?
Good question. The simple answer may be that Fed Chairman Ben Bernanke knows he has several current voting members who oppose QE3, and he doesn’t want to give the impression of a divided Fed. The Fed Open Market Committee (FOMC) is made up of twelve members–the seven members of the Board of Governors of the Federal Reserve System; the president of the Federal Reserve Bank of New York; and four of the remaining 11 Federal Reserve Bank presidents, who serve one-year terms on a rotating basis.
Each year, four members of the FOMC rotate from “voting status” to “non-voting status.” As you can see in the chart below, four current voting FOMC members – Fisher, Kocherlakota, Evans and Plosser – will rotate to non-voting status. Four current non-voting members – Pianalto, Lacker, Lockhart and Williams – will rotate to voting status starting in January.
While the FOMC is widely considered to be a non-political body, its individual members have differing biases when it comes to monetary policy. Those who tend to vote for slower monetary growth are referred to as “hawkish,” while those who tend to vote for faster monetary growth are referred to as “dovish.” The doves would be in favor of QE3 whereas the hawks would likely oppose it.
At present, the dovish members of the FOMC have a voting majority. However, notice in the chart below that with the new rotating voters coming in on January 1, the FOMC will then have a dovish“supermajority.” Outgoing FOMC voters such as Fisher, Kocherlakota and Plosser, who have been outspoken against quantitative easing, will no longer have a vote in 2012.
This could be one of the most dramatic rotations in the Fed’s history. Some of the more hawkish members voted against QE1 and QE2. Starting in January, the only hawkish member of the FOMC will be Richmond Fed’s Jeffrey Lacker who is considered only mildly hawkish and has voted with the doves in the past.
The final FOMC meeting of 2011 will be held on December 13. Few, if any, are expecting the FOMC to vote on QE3 at that meeting. It is much more likely that QE3 will come up at the first FOMC meeting of 2012 on January 24-25 when the doves will have almost exclusive control of the vote.
One other note on the subject of the FOMC: Ben Bernanke’s term as Chairman of the Federal Reserve ends on January 31, 2014. My guess is that he will resign at that time and join the lecture circuit where he will hit the jackpot. If President Obama is re-elected and Bernanke resigns, it’s a good bet that Obama will appoint Janet Yellen as the new Fed Chair. You will note in the chart above that Ms. Yellen is considerably more dovish than Bernanke.
As a final thought, if the financial crisis in Europe continues to worsen, the new voting members of the FOMC will be much more inclined toward bailouts for European banks and perhaps Eurozone governments as well. Should this occur, remember that you heard it here first!
Speaking of the European debt crisis, French President Nicolas Sarkozy and German Chancellor Angela Merkel are proposing to renegotiate the European Union Treaty and mandate that member countries limit their budget deficits to no more than 3% of GDP. The two leaders plan to present such a plan by mid-March and hope to have it ratified by mid-May.
Sarkozy and Merkel are expected to outline the plan in a letter to European leaders this Wednesday with a vote on Thursday. They hope that all 27 E.U nations will vote in favor of the plan on Thursday, but the chances of that happening are next to impossible. If the vote fails to even get the 17 countries that use the euro, this will be BAD NEWS for the markets later this week. Here is an article on the new plan:
Finally, this morning Standard & Poor’s announced that it is reviewing its AAA credit rating for France, Germany and several other Eurozone nations. Pending the outcome of the summit on Thursday, S&P warned that it may downgrade a host of European nations to a “negative outlook.” This, too, would be quite negative for the markets. Here’s an article on point:
Looks like this could be yet another WILD week!
(c) Halbert Wealth Management
