A Fed Divided

From Bloomberg:

More Purchases Hard Case To Make

Federal Reserve Bank of Richmond President Jeffrey Lacker said a new round of asset purchases by the central bank “would be a hard case to make” with economic growth in line with his outlook.

The Beige Book report released by the Fed today shows “what I expected several months ago,” which is an economic expansion of about 2 percent during the second half, Lacker told reporters in College Park, Maryland. He said he would make up his mind on monetary policy when Fed officials meet in two weeks.

Lacker’s comments contrast with Fed Chairman Ben S. Bernanke, who said Oct. 15 that he sees a “case for further action” with inflation too low and unemployment too high. Lacker is among several Fed policy makers who have voiced doubt that the benefits of further asset purchases outweigh the potential costs.

Richard Fischer also reflects some concerns over QE2:

Dallas Fed Speeches

"Of course, if fiscal and regulatory authorities are able to dispel the angst that businesses are reporting and put together a credible plan for deficit reduction that does not choke off growth, further accommodation might not even be needed. If job-creating businesses are more certain about future policy and are satisfactorily incentivized, they are more likely to take advantage of low interest rates, release the liquidity they are hoarding and invest it robustly in hiring and training a workforce that will propel the American economy to new levels of prosperity. This would render moot the argument for QE2, or a second round of quantitative easing. The key is to remove or reduce the tax and regulatory uncertainties that act as an impediment to businesses as they respond to increases in final demand. I think most all would consider this to be a far more desirable outcome than being saddled with a bloated Fed balance sheet."

"My reaction to reading that article [in the Wall Street Journal on "Central Banks Open Spigot"] was that it raises the specter of competitive quantitative easing. Such a race would be something of a one-off from competitive devaluation of currencies, a beggar-thy-neighbor phenomenon that always ends in tears. It implies that central banks should carry the load for stymied fiscal authorities - or worse, give in to them - rather than stick within their traditional monetary mandates and let legislative authorities deal with the fiscal mess they have created. It infers that lurking out in the future is a slippery slope of quantitative easing reaching beyond just buying government bonds (and in our case, mortgage-backed securities)."

A brief summary from Bloomberg indicates that Charles Plosser has doubts about QE2.

He characterizes the Fed buying Treasuries as "monetizing debt." The Philly Fed president said that a second round of quantitative easing would make it harder for the Fed to unwind its balance sheet and risk more inflation. He is doubtful that the benefits of QE2 will outweigh the costs.

Note that there are many members that support QE2 such as Charles Evans and William Dudley:

Then NY Fed William Dudley said that the economy has lost momentum and accommodation could help. And now Chicago Fed President Charles Evans specifically says large-scale asset purchases by the Fed are needed. Evans describes current circumstances as a liquidity trap. He calls for targeting real interest rates with higher inflation needed. The Fed seems to be prepping the markets not just for QE2 but also for some type of more explicit inflation target.

There is growing concern amongst Fed Presidents that QE2 will result in unintended negative consequences.  They "doubt that the benefits of assets purchases may outweigh the costs".   

President Fischer in particular has raised the concern of tax and regulatory uncertainties, and the moral hazard of competitive currency devaluations overcoming any benefit of more QE.

My concerns are:

1) the potential for political grid lock and business concerns over potential tax increases may increase the jobless count.

2) that QE2 may contribute to even higher unemployment levels as money flows into commodities and squeezes narrow manufacturing margins further as pricing power is lost in a deflationary environment.

The threat to recovery as I see it, is rather than take the medicine being dispensed by the economy, QE2 will proceeds as planned, as the majority of Fed Presidents have indicated their support at this time.

We will watch with interest the events as they unfold in early November.