As the Fed’s final monetary policy meeting of the year rapidly approaches
on Dec. 11-12, there is “substantial sentiment” for continuing to buy $45
billion of long-term Treasury securities beyond Dec. 31, as MNI has reported. By
replacing “Operation Twist” with outright Treasury purchases, the Federal Open
Market Committee would expand “QE3″ from $40 billion (in monthly mortgage backed
securities buys) to $85 billion. While the FOMC could change the mix of MBS and
Treasuries, it’s just as likely current proportions will be maintained. It’s
unlikely the FOMC will delay a decision or further extend Twist.

New York Federal Reserve Bank President and FOMC Vice Chairman William
Dudley did nothing to disabuse market expectations of continued large Treasury
purchases. He was ostensibly neutral: “Following the framework we set out in
September, I will be will be assessing the employment and inflation outlook in
order to determine whether we should continue Treasury purchases into 2013.” He
was referencing the FOMC’s Sept. 13 statement that “if the outlook for the labor
market does not improve substantially, the Committee will continue its purchases
of agency mortgage-backed securities, undertake additional asset purchases, and
employ its other policy tools as appropriate until such improvement is achieved
in a context of price stability.”

But Dudley made clear, with the FOMC meeting two weeks off, he doesn’t see
“substantial” improvement. He called growth “disappointing” and the unemployment
rate “unacceptably high.” He said “too many people are discouraged from looking
for work” and noted 5 million workers have been unemployed for six months or
more. “While job growth has picked up some recently, its pace has been
insufficient to materially change the labor market picture,” he said. “We must
grow faster if we are to put all of our jobless workers and idle businesses back
to work.”

And Dudley suggested inflation is no impediment to expanded QE3. He said
overall inflation is “still around 2% — significantly lower than last year.”
And “the signals from underlying inflation pressures, compensation trends, and
longer-term inflation expectations are all fully consistent with our longer-run
inflation objective of 2%.” He added “price increases are likely to be at or
slightly below our 2% longer-run objective over the next few years.”

And so Dudley vowed the Fed “will continue to do our part to push the
economy towards maximum sustainable employment in the context of price
stability.” The Fed “will promote maximum employment and price stability to the
greatest extent our tools permit, and we will stay the course. When we achieve a
stronger recovery in the context of price stability, I’ll view it as consistent
with our goals and not a reason to pull back on our policies prematurely. If
you’re trying to get a car moving that is stuck in the mud, you don’t stop
pushing the moment the wheels start turning — you keep pushing until the car is
rolling.”

Chicago Fed President Charles Evans, who will be an FOMC voter next year,
said that, to get the kind of “substantial” improvement needed to halt Fed asset
purchases, he would want to see non-farm payrolls grow by at least 200,000 per
month for six months, as well as a faster pace of GDP growth. And those are just
his hurdles desisting from quantitative easing. “Once we established that there
has been this substantial improvement in labor markets, we would stop adding to
our balance sheet,” he said. “But we would keep the funds rate near zero for
some time longer.” Last year, Evans proposed keeping the funds rate near zero so
long as unemployment is 7% or higher and inflation does not exceed 3%. Now he
favors thresholds of 6 1/2% unemployment, 2 1/2% inflation.

Dallas Fed President Richard Fisher, meanwhile, took exception to use of
the term “QE3 infinity,” saying, “there’s no such thing. We are not going to go
that route.”

The Fed’s beige book survey, conducted before Nov. 14, provides no barrier
to an $85 billion QE3. It found a “measured” pace of economic growth, but only
two of the 12 Federal Reserve Banks reported stronger growth. Seven called
growth “modest,” and three said growth was either “slower” or “weak” — all in
the context of “modest” wage-price hikes.

[TOPICS: MMUFE$,M$U$$$]