Msrk Thoma; The Fed’s Monetary Policy Meeting: Will Policy Change?
Mark Thoma:
The Fed’s Monetary Policy Meeting: Will Policy Change?: The Fed’s Federal Open Market Committee is meeting today.... [T]here are substantial headwinds pushing against the recovery, but there is uncertainty over how long they will persist.... My own view is that the weakness is likely to be with us for awhile, and that it would be a mistake for policymakers to dismiss the recent data as a temporary blip in the recovery.... QE2 — which expanded the Fed’s balance sheet in an attempt to stimulate the economy — is coming to an end. In response, the Fed can make three choices. It can expand the balance sheet further by moving on to QE3, maintain the balance sheet at its present size, or begin reducing the size of its balance sheet immediately (i.e. sell the assets it purchased during QE1 and QE2).... I think the chances of QE3 at this point are non-existent. If the economy continues to weaken, then perhaps the Fed will consider it, but conditions are not yet bad enough for the Fed to take this step.
If anything, the Fed is inclined to move in the other direction.... When will the balance sheet reduction begin? The first thing that will happen is that the Fed will stop reinvesting maturing securities, and after a time it will also begin selling the financial assets it accumulated during QE1 ad QE2. Several months back I expected the first step to happen in late summer. But now I expect it to be much later than that, near or past the first of the year.... As for interest rates, the Fed won’t begin increasing rates until after balance sheet reduction is well underway...
