Get ready for QE3

FOMC signals another round of bond-buying soon

 

Top officials of the Federal Reserve are leaning strongly in favor of a third round of bond buying by the Fed, known colloquially as QE3, according to the minutes of the Aug. 1 meeting of the Federal Open Market Committee.

Here’s the money quote from the FOMC minutes: “Many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery.” Read our full news coverage of the minutes.

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The economic data have stabilized since Aug. 1, but it’s not at all clear that the improvement in the economic data has been “substantial” enough to forestall further action by the Fed.

While the language in the minutes certainly doesn’t commit the Fed to QE3, the minutes do show that the Fed is predisposed to act at the Sept. 12 and 13 meeting. In the jargon of the FOMC, the term “many members” usually indicates a majority of the 12-member committee that runs U.S. monetary policy.

It’s going to be a close call. Several members of the FOMC object vehemently to any additional accommodation. Their objections? It wouldn’t have much impact on the economy; it might disrupt markets; and it could lead to financial instability and higher inflation expectations.

Those objections have not swayed the majority, however, which apparently views the benefits of doing more outweighing the costs.

According to the minutes, “many participants” said that a new large-scale asset-purchase program could “provide additional support for the economic recovery” by lowering long-term interest rates and by “contributing to easier financial conditions more broadly.” Others said that QE3 could help by boosting business and consumer confidence.

With the economy growing at a mediocre 2% annual pace, with inflation subdued and unemployment at unacceptable levels, the Fed fears that the economy is too weak to sustain another blow from outside.

And with Europe sliding toward a breakup and Congress skidding closer to the fiscal cliff, the odds of another economic shock are rising daily.