SF Fed Chief Supports QE3

In an interview with the San Francisco Chronicle, San Francisco Federal Reserve president John Williams said that the slow economic recovery and the continuing high unemployment have persuaded him that the Fed needs to get busy with a third round of quantitative easing. Williams’ comments fit with those made earlier this week by Boston Fed president Eric Rosengren, who said the US economy is just “treading water” and the Fed needs to start buying assets again in a big way and with no limit. Williams has a vote on the FOMC, but Rosengren does not.

There’s an old saying: When all you have is a hammer, everything looks like a nail. Well, the Fed’s QE hammer has taken two whacks at the US economy and production capacity is still under-utilized and unemployment is still high. While a third hammer blow will certainly please big banks and most investors, the only thing that will permanently fix the US economy is a putting cash back into consumers’ pockets in a large enough amount to give them enough confidence to spend. The US economy needs jobs in order to create demand and the only thing left for the Fed to do is conduct open-market asset purchases.

The single biggest hurdle to QE3 is the Fed’s fear that it will be viewed as a partisan move supporting President Obama’s re-election. Maybe so, but it’s hard to see how an announcement of QE3 in at the next FOMC meeting in mid-September is going to have much effect on November elections.

Other opponents of QE3 cite inflation fears and using easing too early just because it’s the only weapon the Fed has left. But inflation is not and likely will not be an issue for some time yet, and again, now that interest rates are essentially zero the only weapon the Fed has left is easing.

Paul Ausick