US Federal Reserve set on QE2 course as dissenter speaks out

The Federal Reserve’s leading opponent against more quantitative easing said there’s “no strong evidence” it will work, as the minutes from the central bank’s last meeting cemented expectations that his colleagues believe more money printing is necessary.

Dees Illustration

Richard Blackden

Thomas Hoenig, the president of the Federal Reserve Bank of Kansas, on Tuesday launched his most strident attack yet against QE, arguing it would not help drive an economic recovery.

“There is simply no evidence the additional liquidity would be particularly effective in spurring new investment, accelerating consumption, or cushioning or accelerating the deleveraging that is hopefully winding down,” Mr Hoenig told an audience in Denver.

However, the separate release of the minutes of the Fed’s Open Market Committee (FOMC) meeting on September 21 underlined that Mr Hoenig is in a minority of one in his dissent.

Although the minutes acknowledged that FOMC members expect the recovery to be sustained in 2011, much of the nine-page statement emphasised their fears that an already faltering economy could lose further momentum. In particular, the minutes voiced concern over a slowing in business investment, muted inflation and the still high level of unemployment.

“Several members noted that unless the pace of economic recovery strengthened or underlying inflation moved back toward a level consistent with the Committee’s mandate, they would consider it appropriate to take action soon.”

Stock markets were cheered by the news with the S&P 500 erasing losses after the release of the minutes, which also explained that the Fed’s statement of Sept 21 was designed to convey “members’ sense that such accommodation may be necessary before too long.

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