Did The Republican Letter To Bernanke Seal The Deal For Even MORE QE? JP Morgan's Take
As we reported, last night a quartet of GOPers (re)sent a letter to Bernanke demanding no more QE. To be sure this was not the first such letter, and followed a nearly identical missive sent back in November of 2010. And while the ultimate purpose of this letter is unclear, and is unlikely to prevent the Fed from doing the only thing it believes it should do: i.e., spark the economy by reflating asset values, aka printing or duration extending - or the only things it knows how to do, did the republicans just shoot themelves in the foot and allign the dissenters against growing opposition to a full blown LSAP episode? Here is JP Morgan's Michael Feroli explaining why this may be the case.
Just when you thought economic policy-making in the US couldn't get any worse, last night elected Congressional leaders chose to pressure the central bank during an ongoing monetary policy meeting. Economists disagree on many things but one proposition that has near-universal assent is that sound monetary policy should be conducted free of political interference. What does the Congressional pressure mean for the outcome of today's meeting? One view is that since the letter to Bernanke warned against further monetary stimulus, the FOMC will be less likely to provide monetary stimulus -- through either Operation Twist or other means. It is also possible, however, to reach the opposite conclusion: at the margin the Committee may be more likely to provide stimulus in order to assert their independence and demonstrate that they will not be politically intimidated. Our view is that this Congressional letter will have no impact on the Committee's decision: the Chairman has no illusions about winning any Capitol Hill popularity contest and is more likely leading with an eye to how economic historians judge him many years from now.
Another question is how the political pressure will affect potential dissenters. In the absence of this letter we would expect up to three hawkish dissents once again -- provided the Fed takes some action -- and possibly one dovish dissent from Evans. However, the letter from the Congressional leaders cited in support of its view "significant concern expressed by Federal Reserve Board Members," among others. (Presumably the letter meant FOMC members, as Federal Reserve Board members have been generally supportive of Bernanke's policy). There is a chance that Committee members who have some reservations about Fed policy may now be less likely to dissent, to avoid validating the views expressed in the Congressional letter, as surely all on the FOMC -- hawk or dove -- would find this political meddling repugnant. It's probably still the case that we get another handful of hawkish dissents, though there is now a chance the Committee circles the wagons in response to the political pressure and we get fewer than three dissents.