QE3 and beyond: $85 billion per month and counting

Federal Reserve Chairman Ben Bernanke Federal Reserve Chairman Ben Bernanke

The Federal Reserve rang out the old year with fireworks, but the New Year could be just as explosive.

There can be little doubt that a majority of the Fed's policymaking Federal Open Market Committee (FOMC) member are fully prepared to expand its balance sheet even further than it already is planning to do in an effort to stimulate the still-sluggish economic recovery and reduce unemployment.

The one thing that could change that, of course, is a significant pick-up in growth and a realization of the "substantial" labor market improvement the FOMC has been seeking since it approved $40 billion per month of mortgage backed securities purchases in September.

But few forecasters, inside or outside the Fed, are looking for dramatic improvement on 2012's 2% growth pace or in the jobs picture.  Fed officials, in their latest forecast, are projecting the unemployment rate will still be 7.4% to 7.7% at the end of 2012.

A resolution of the budgetary deadlock, as now seems likely, through higher taxes on "the rich," including many small businesses, might end much of the uncertainty that has dampened hiring and investment. But a tax jolt on producers with little meaningful spending restraint hardly seems a prescription for appreciably faster growth.  Nucor CEO Dan DiMicco recently remarked that "the focus on higher taxes in the fiscal cliff negotiations almost guarantees another year of tepid growth."

Some Fed officials have grave doubt whether more doses of monetary stimulus can do much to boost real output or employment. "Employers will not deploy the cheap and abundant capital on hand toward job creation while there is so much uncertainty surrounding final demand for the goods and services they sell....," says Dallas Federal Reserve Bank President Richard Fisher. "Until they know what their taxes will be or how federal spending patterns that affect them and their customers will change (or, one might add, whether the nation will have a more rational regulatory structure), they will sit on their abundant money rather than spend it on unemployment-reducing expansion."

But that's not the predominant view, and the FOMC's policy statement and the comments of Fed Chairman Ben Bernanke at his post-FOMC news conference embody an unmistakable bias toward further easing.

December FOMC meetings have traditionally been rather staid affairs, but not this past one. Not wanting to compound the problems of the "fiscal cliff" with a monetary cliff, the FOMC fully replaced the $45 billion of expiring "Operation Twist" Treasury bond purchases, financed by sales of short-term Treasuries, with outright purchases of the same amount, financed by creation of new bank reserves.

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