The Federal Reserve’s Federal Open Market Committee meets next week to consider monetary policy in light of economic developments since its previous meeting in June.
Given the steady stream of weak economic data, it can be expected that the FOMC will at least discuss a further round of quantitative easing – potentially a “QE3” to follow up last fall’s move to QE2.
Anemic GDP growth of below 1% during the first half of 2011 should be sufficient to consider further Fed action, but it’s probably worthwhile to look at the data points that persuaded FOMC members last year.
Here’s the key language from the November 2010 FOMC statement:
Information received since the Federal Open Market Committee met in September confirms that the pace of recovery in output and employment continues to be slow. Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising, though less rapidly than earlier in the year, while investment in nonresidential structures continues to be weak. Employers remain reluctant to add to payrolls.
On almost every measure of weakness cited by the Fed, conditions today are at least as bad – and some worse – than in the late-summer and fall of 2010.
Consumer spending actually fell in June for the first time since September 2009, and has been essentially flat since May. The unemployment rate is lower than the 9.6% of August 2010, but not substantially – and with a significant drop-off in workforce participation. Income growth and consumer spending remain modest if not stalled. Business spending on equipment and systems is decelerating, and remains well below 2010 rates. Housing starts remain depressed. And investment in non-residential structures has flatlinedafter bouncing back strongly last year.
Perhaps the only improvement has been in the availability of credit, although credit growth is suffering from weak demand.
If FOMC members use the same gauges they used in 2010 to assess the need for additional quantitative easing, we should be expecting a QE3-peat.
Tony Fratto, is a Managing Partner at Hamilton Place Strategies, former Assistant Secretary at the U.S. Treasury Department, and a former White House official. He is also an on-air contributor for CNBC and founder of the policy discussion website rooseveltroom.net You can follow him on Twitter at http://twitter.com/TonyFratto.