The recovery remains subpar, but has improved enough to moderate Federal Reserve rhetoric about injecting more monetary stimulus. A third round of large-scale asset purchases, or “quantitative easing,” remains possible.
With or without “QE3,” there is little prospect of the Fed’s rate-setting Federal Open Market Committee (FOMC) bringing forward hikes in the federal funds rate from the late-2014 conditional time frame. That implies no asset sales to shrink the Fed’s bloated securities portfolio until 2015 — unless the economy proves much stronger and unemployment lower than expected.
QE3 was very much on the table early in the year. Minutes of the Jan. 24-25 FOMC meeting show “a few members feeling current and prospective economic conditions — including elevated unemployment and inflation at or below the committee’s objective — could warrant the initiation of additional securities purchases before long.” Others thought such policy action could become necessary if the economy lost momentum or if inflation seemed likely to remain below its 2% mandate.
In his post-FOMC press conference, Bernanke said the FOMC “is prepared to provide further monetary accommodation.”
Even while acknowledging housing and mortgage credit problems were rendering low interest rates less effective, he said, “If inflation is going to remain below target for an extended period and unemployment progress is very slow, then ...there is a case for additional policy action....”
The Fed chief even suggested a situation could arise where the Fed would maintain an easy money policy in spite of inflation running above the 2% target. After saying the FOMC treats price stability and maximum employment goals symmetrically, he said, “If inflation did go above target by modest amount, we would certainly try to get it back down to target. But if unemployment were very high, that would lead us to be more cautious and slower in returning to target....”
By the time Bernanke delivered his semi-annual Monetary Policy Report to Congress on Feb. 29, he was toning down such talk. The unemployment rate had fallen to 8.3%; fourth quarter GDP growth had been estimated at 3%; the European debt bomb had been somewhat defused and the Fed was confronting an oil price spike.