Plosser Against New Round Of QE, Rosengren Favors More Stimulus

We had two Fed officials speak today Charles Plosser and Eric Rosengren. What is interesting is that there seems to be a divide forming within the Fed about more QE (money printing). Mr. Plosser (currently a non-voting member of the FOMC) is against it on the basis that it will do nothing to help the real economy or lower unemployment. All it will do is lower treasury yields by a insignificant 10 to 20 bps. The only time when he would consider more QE is if there was a real chance of deflation, which he does not think is likely. He notes:

"Because I see little gain at this point, and some costs, I would prefer not to engage in further asset purchases at this time," Plosser said in prepared remarks delivered at a chamber of commerce event in Vineland, N.J. "The Fed must be credible," the central banker said. "Protecting that credibility is why, based on my current outlook, I do not support further asset purchases of any size at this time."

The problem is that Mr. Plosser does not get to vote until 2011. While, Mr. Plosser is against more QE, Boston Fed president Rosengren (voting member FOMC) postulates that it may be necessary to support economic growth with more QE. Apparently he has not seen Morgan Stanley's econometric models which show that a 2 trillion asset purchase by the Fed would 1) lower Treasury yields by 50bp; 2) increase GDP growth by 0.3pp in 2011 and 0.4pp in 2012; and 3) lower the unemployment rate by 0.3pp by the end of 2011 and 0.5pp by the end of 2012. Simply, stated if the Fed continues money printing at this point it is debt monetezation regardless of what they day. Mr. Rosengren offers the usual generic arguments for money printing:

"While the economy is growing, it is currently growing too slowly to significantly reduce the unemployment rate or stem disinflationary pressures created by the high degree of slack in the economy," Federal Reserve Bank of Boston President Eric Rosengren said.

"My firm view is that it is important that policymakers be open to implementing policies consistent with achieving full employment, and an appropriate level of inflation, within a reasonable time frame," he said.

"Views on securities purchases differ within the ranks of policymakers and all manner of observers," Rosengren said. "It is important to keep firmly in mind the goal of such purchases: to stimulate the economy by reducing long-term interest rates to a level that is more consistent with where they would be, were we able to further reduce the federal funds rate."

Despite the fact that money printing does nothing to help the economy, Rosengren's argument is what the hell lets print some more and see what happens. The problem for people who believe in monetary sanity is that there seems to be only one voting member who is willing to challenge Zimbabwe Ben and that is Hoenig of Kansas City. Fisher of the Dallas Fed (non-voting member) has historically talked a good game about prudence, low inflation, etc., but has not had the courage to vote against Bernanke. Currently the Zimbabwe School of Economics is the dominate force at the FED.

Black Swan Insights

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Plosser Against New Round Of QE, Rosengren Favors More Stimulus