QE3 is still on the table, Fed minutes show

Julian Harris
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A CONTROVERSIAL third phase of quantitative easing could still be on the cards in the US, it emerged last night.

Two of the Fed’s 10-person committee “said that current conditions and the outlook could justify stronger policy action” than the central bank’s Operation Twist, the minutes to its September meeting revealed.

Operation Twist – which the Fed announced last month -- involves it selling shorter-term paper to finance the acquisition of longer-term bonds. The move is an attempt to hold down long-term yields, with the aim of boosting private sector investment in the economy without having to raise the size of its own balance sheet.

Yet the Fed’s balance sheet could still be expanded with more asset-purchases, the minutes showed.

“A number of participants saw large-scale asset purchases as potentially a more potent tool [than Operation Twist] that should be retained as an option in the event that further policy action to support a stronger economic recovery was warranted,” the minutes said. The unnamed couple of Fed members leaning towards QE3 said that they had supported Operation Twist because it did not rule out bolder interventions.

Yet three hawks on the committee continue to make a stand against the Fed’s ultra-loose policy. Richard Fisher, Narayana Kocherlakota, and Charles Plosser voted against the Fed’s statement.

Plosser last night said that America’s sticky level of unemployment was still “a serious challenge”, despite a relatively positive jobs report for September.

“As the economy strengthens, prospects for labor markets will continue to improve and the unemployment rate will gradually decline, undoubtedly too gradually for many of us,” Plosser warned.