Right now the Federal Reserve appears to think:
- fiscal policy is about to become inappropriately tight.
- monetary policy is appropriately loose.
This, to me, does not make sense. If the Federal Reserve knows that the Congress is about to make a mistake, it should act to offset the consequences of that mistake and neutralize the damage.
Yves Smith Ed Harrison tells us, correctly I think, that that is not going to happen:
The Fed is on hold « naked capitalism: I have consistently warned for the past few months that the Fed would pause before rushing into QE3. I reiterated this yesterday. Yet, somehow people came away from Ben Bernanke’s testimony before Congress yesterday thinking the Fed was going to crank up the QE3 keyboard strokes. It’s not going to happen.... If economic growth in the U.S. does not falter in the second half of 2011, the Fed will look to drain excess reserves from the system as preparation for an interest rate hike at some unforeseeable future date.
There is immense pressure on the Fed from within as well as politically to refrain from more unconventional policy. The economy will weaken significantly before the Fed moves against it – and only then because of vocal outcries for more policy stimulus.
Tim Duy sees this as well – and he wants more from the Fed. Bottom line: there will be no stimulus unless the economy and/or asset markets deteriorate further.