Hilsenrath: Fed's Kohn Says Will Give "Very Serious Consideration" To QE3

Tyler Durden's picture

As always happens, about a week after Goldman telegraphs the need for QE3, which they did last Friday, the WSJ's Fed mouthpiece Jon Hilsenrath reaches out to the media and proceeds to give the secret QE handshake. Now in its third iteration. In an "exclusive" interview with the Fed's last tree monetary affairs committee, Donald Kohn, Vince Reinhart and Brian Matigan, Hilsenrath observes that according to these masters of the universe the chance of another recession is 20-40%, which we are confident is a given at 100%, but more importantly, he quotes Don Kohn who "said the Fed still has some options to support the economy, but "they're kind of limited." He said he expects the central bank, which holds a policy meeting Aug. 9, to wait and see whether the recovery is really losing steam before taking any action. If that's the case--and inflation is coming down--then he would give "very serious consideration" to a new round of bond purchases, he said." Well, the 30 Year is at 2011 lows, TIPS are screeching, and stocks are plunging: all indications that the market anticipates deflation. Looks like the only wildcard is whether the FOMC will determine next Tuesday that the economy has slowed down. Which it has. We believe the August 9 statement will be very interesting to most, and will result in some quite serious market volatility, as ever more are pricing in hints of an imminent resumption of LSAP or, in the least, Operation Twist with the confirmation likely to come at this year's Jackson Hole meeting, as we predicted back in April.

From the WSJ:

In an exclusive interview this week with The Wall Street Journal, Donald Kohn, Vincent Reinhart and Brian Madigan--the last three directors of the Fed's powerful monetary affairs committee--put the risk of a new economic contraction at between 20% and 40%. Madigan and Kohn said the Fed should consider a third round of bond purchases only if inflation slows from recent elevated levels and if the economy continues to underperform. But they cautioned a new purchase program, dubbed QE3, wouldn't represent a cure-all.


Reinhart, who said he gives Congress "a very low grade" like most Americans, believes the odds of a credit downgrade by rating companies haven't changed following the debt deal. Standard & Poor's was looking for 10-year budget cuts of $4.0 trillion to confirm the U.S.'s top-notch AAA rating. 


Madigan, who advises Barclay Capital and teaches at Georgetown University after retiring from the central bank a year ago, said the Fed's $600 billion bond purchases that ended in June had a "relatively modest" positive effect on the economy. "Purchases of that order of magnitude could be helpful at the margin," he said in his first public interview since leaving the key position at the Fed.


"We're flying the plane slower and closer to the ground, so we're less resilient to adverse shocks," said Reinhart, who puts the odds of a new
recession at 40%. Following a financial crisis, seven out of 15 countries studied by Reinhart have experienced two recessions over a 10-year period.

Most important were Kohn's remarks:

Kohn said the Fed still has some options to support the economy, but "they're kind of limited." He said he expects the central bank, which holds a policy meeting Aug. 9, to wait and see whether the recovery is really losing steam before taking any action. If that's the case--and inflation is coming down--then he would give "very serious consideration" to a new round of bond purchases, he said.


Kohn noted the deal leaves lots of uncertainty over the path of fiscal policy, making it harder for the Fed to decide what to do with monetary policy. The debt deal doesn't specify what happens to the payroll-tax cut enacted in January and passes on the key long-term decisions of cutting the deficit to a bipartisan committee.


While more bond purchases could help the U.S. economy at the margin, Madigan said that providing more explicit guidance on how long the Fed's short-term interest rate remains close to zero--another easing option mentioned by Bernanke--wouldn't be so effective.

The irony is that we all know the Fed knows one thing and one thing only: printing, and any of its infinite variations, which can be named anything but which do nothing to change the fact that the Fed will i) continue to push risk assets higher, ii) continue to take on ridiculous duration risk: its DV01 now is about $1.5 billion if not more, and iii) issue its daily Conviction Sell Price Target on the USD as zero in the medium- to long-run.

Everything else is much overused foreplay and strategically placed mirrors.

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spiral_eyes's picture

it'd be stupid if they do. china and russia and all the treasury holders are pissed at hell at this loose money zero interest rate policy bullshit. just yesterday putin came out with this:


Dr. Engali's picture

When has anything these clowns have done made any sense?

Bastiat's picture

Maybe he should "seriously consider" accepting the Flying Spaghetti Monster as his personal saviour?

john39's picture

could set up a great head fake with rumors of QE3 however.  image the carnage when it fails to materialize.

alangreedspank's picture


Yeah, that could be a possibility. It's not like TPTB were not caught before betting against the financial products they themselves sell.

malikai's picture

Words that politicians say mean nothing. Until they put their "money" where there mouths are, it means tee-tee.

mason5566's picture

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Sudden Debt's picture

HHMmmm.... PRInT!!! .... looks like a nice logo to put on the jetpack for Silver :)

TruthInSunshine's picture




Dumbass Kohn was supposed to wait until 3:15 or 3: 25 p.m. to make this announcement!

We will see red reassert itself now, and everyone will worry their pretty heads off as tanks do a double intraday reversal!

Oooooh, The Bernank is gonna be mad at The Kohn!! Kohn is going to get cornholed before Moloch at Jackson Hole.

Sudden Debt's picture

that's the real problem these days. Nobody is sticking to the script to the letter.... I even wonder if they all read it...


Hedgetard55's picture

I was wondering what juiced stocks back to flat. Yea, dumbass should have waited.

Cdad's picture

This is a very sickly looking snap back.  The quote stuffing directional moves are coming minute to minute, which is exactly what my board looked like this morning before she plunged.

Good luck with it...as there is obviously zero confidence in it.

tekhneek's picture

He meant "BUY AGQ!!!!!!!!!"

baby_BLYTHE's picture

it is very simple

the money printer will continue to print money.

He will print or die trying.

"The U.S. government has a technology, called a printing press (or today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at no cost."

Mae Kadoodie's picture

Does QE3 trigger an automatic downgrade of US debt?

baby_BLYTHE's picture

if the rating agencies want to have any credibility, then yes.

Dr. Engali's picture

They gave up their credibilty a long time ago. They showed their true colors when they jumped on the scare band wagon then followed up with a big....in the imortal words of Emily Litella...... "nevermind"

tyler's picture

The rating agencies are a carbon copy of the CFTC.  All bark no bite.

Buckaroo Banzai's picture

If the ratings agents are dirty whores, then no.

Buckaroo Banzai's picture

But in defense of the ratings agencies, the ratings are supposed to reflect the possibility of the return OF one's investment, not return ON one's investment. Since we can "print to fit", then technically, we'll always be AAA.

Quintus's picture

If you ask a real ratings agency then I guess they would say 'Yes'.

However, if you ask Moody's S&P or Fitch, they are more likely to take the view that more QE should result in an upgrade to the newly-created AAAA rating on the basis that there will be lots more money available with which to pay interest on the national debt.  More money is always good, right?

Bam_Man's picture

Get it on,

Bang Dagong,

Get it on!

DonnieD's picture

They will upgrade our credit rating to Quad A when Congress removes that pesky debt ceiling. Once you do that, your invincible in the eyes of those morons.

TruthInSunshine's picture

Moody's is rethinking its position and has spoken about the possibility of re-rating the U.S. as AAAA+++XtraSpecial, which is a new category they would create.

Josh Randall's picture

Everyone knows the US has been on DOUBLE SECRET PROBATION since 2008, so this may just be more jawboning by Moody's

TruthInSunshine's picture

Bernank sez:


It puts the lotion on its skin or else it gets the hose again.


But will it listen?

Iriestx's picture

This should be enough to immediately end the consecutive losing streak.


Edit: Boom, straight up, here we go to a green close on the most vague suggestion of QE3.

EscapeKey's picture

On the contrary - this could add to the losses.

The PDs, upon seeing this, should come to realize that if they depress the markets, it will force the hand of the FRB.

malikai's picture

I'd reckon they already knew. And beyond that, there has probably been some active crushing of indices and commodities this week. Gold and silver are the rogues, but they will be dealt with. The objective is a point-to for "lessened inflation expectations". As for gold and silver, they (silver) will be vulnerable in the next couple of days to margin hikes and late US day takedowns. Once the downward momentum in everything is started, they will try to make the case for QE3.

slaughterer's picture

Problem is: inflation is not expected to lessen until 2012. 

EscapeKey's picture

Growth in producer input prices are heading downwards, this change amazingly materialized almost as soon as QE2 ended. Soon, input prices will decrease.

However, just because their input prices go down, does not mean consumer prices will fall as much as they increased. Ie, I keep seeing price increases down my local patrol station, but the drops do not match the equivalent rises.

Joe Davola's picture

This week my Quicken Inflation Index hit 9 - the number of budget categories I will exceed this calendar year.  I only wish I could eliminate inflation in stuff required to live as easily as the Bernank claims he can.

EscapeKey's picture

Well, obviously you don't buy enough iPads.

Joe Davola's picture

True that - it was the iProperty Tax that pushed the number to 9.

malikai's picture

Have you seen the new iStopPaying? It's pretty cool. Value up 100%. It's guaranteed to give you 100% or your money back.

slaughterer's picture

Oh yes, second problem is: Donald Kohn is retired from the Fed.

Donald Lewis Kohn (born November 7, 1942) is an American economist who served as the former Vice Chairman of the Board of Governors of the Federal Reserve System. He is considered a moderate dove on fiscal policy. He retired after 40 years at the central bank in September, 2010.

TruthInSunshine's picture



Justin Bieber voiced his support for a QE3 like program and the markets loved it.

Coincidentally, 7 out of the top 10 spots on RoboFader's playlist are occupied by Justin Bieber songs.

Firing Pin's picture

Good call re: retired. Also, he said the same thing in Sept of 2010:



-sorry for the link to the liberal rag NYTimes...

Firing Pin's picture

Good call re: retired. Also, he said the same thing in Sept of 2010:



-sorry for the link to the liberal rag NYTimes...

Iriestx's picture

Robots gotta robot.  There's no humans on that swtich. 

-Michelle-'s picture

Oh, I thought there was no inflation.  Well, gee.

ETA: Up goes the Dow and down goes gold...