Nouriel Roubini spoke to CNBC today about the Speech that Federal Reserve Chairman Ben Bernanke will deliver tomorrow. Nouriel Roubini does not expect Bernanke to announce QE3 in this speech. However, he does expect QE3 at some point in the future because the economy is so weak.
My view is similar. However, I would make two key points. The Fed has already begun its third easing campaign. Fed doves have wanted some sort of easing. Fed hawks want no part of this. Moreover, Ben Bernanke knows darn well the Fed has spent its political capital. Rick Perry’s comments about Bernanke’s committing ‘treason’ if the Fed did QE3 demonstrate what kind of political environment in which the Fed operates. So the doves have been forced to alter QE3. This campaign will be all about the easing and not at all about the quantitative. Expanding the balance sheet via asset purchases – a.k.a. printing money – is toxic monetary policy, treasonous, if you will. That kind of easing is history – unless recession and debt deflation is all around us.
The Fed is likely to soft peddle this policy change… so the Fed could start off by signalling to the market that it will conduct what I have been calling ‘permanent zero’. Eventually people will be forced to accept this – and the term structure will flatten further and further out the curve.
This is what is happening right now.
Second, the Fed is already feeling political heat from its previous policy actions, so it will allow the economy to slip before it embarks on the next round of asset purchases. Therefore, if and when the next recession hits, debt deflation will take hold. The calls for stimulus will be deafening. And because the Fed will have resisted more aggressive prior action, the Fed will then be forced to be extremely aggressive in its policy response. That is when expanding the balance sheet will be a go and the Fed won’t just buy Treasuries, but a lot of other assets too.
The CNBC video is below.