Just when we were getting our heads around the idea that we’re speeding down Fiscal Street and about to go careening off of “fiscal cliff,” a new – and similar – risk has been added to the mix this morning.
According to Goldman Sachs economist Jan Hatzius, the Federal Reserve is essentially driving down Monetary Road and there’s a good chance we’re about to also have an accident at “monetary cliff,” following Wednesday’s moves that slashed the growth target and extended the rate-rejigging plan called Operation Twist.
What this means is, if there’s not an unexpected improvement in the jobs market and economy in the back half of the year, then come 2013, the Fed will have no choice but to lever up and undergo another round of quantitative easing or QE3. If true, it would be a move rife with political, economic and inflationary risks as well as one that might not even work.
“I question how much additional quantitative easing, as well as what the Fed did yesterday, really impacts the real economy,” says Jerry Webman, Chief Economist at OppenheimerFunds in the attached video. “I’m not sure there’s a lot they can do that’s going to really goose the economy at this point.”
From Webman’s point of view, Ben Bernanke has already repeatedly urged Congress to help carry the load and address the aforementioned fiscal dangers that have been brought on by uncertainty surrounding tax and budget policy, arguing that the Fed chief needs to say again, “guys this is not entirely up to us,” in terms uncertain.
The risk in unambiguously asking for help, however, is spooking the markets by making the problem seem as if it is beyond the Fed’s control. That the so-called “Bernanke put,” that implies the Fed will always be there to save the day, may be about to expire.
To be sure, not everyone feels QE3 is a done deal for Q1, but it is clear that a new derby of sorts has begun and the wagering will be set on a data-point-by-data-point basis from now on.
“I think it’s also a still a question of ‘if,'” Webman says about the prospects for QE3. “I mean, if the economy continues its slog forward, I think the Fed wouldn’t want to attempt some kind of policy that would have a marginal effect and open them up to the criticism of being politicized.”
Of course, even if they do nothing, the Fed still risks being politically labeled, or worse, inept.