Is the Fed finished?
THE Financial Times has a story by Robin Harding above the fold this morning, headlined, "Fed to signal end of monetary easing". Sounds like big news! What's it all about?When the rate-setting Federal Open Market Committee meets on April 27, it is unlikely to limit its options by ruling out asset purchases beyond the second $600bn “quantitative easing” programme – or “QE2” – that is due to finish by the end of the second quarter.Fed officials, however, know that announcing more asset purchases at the last minute would disrupt markets. Silence on a follow-up “QE3” at next week’s meeting would therefore signal that their current intention is to complete the $600bn QE2 programme and then stop.I understand what Mr Harding is saying here. Based on recent statements from key people on the FOMC it seems clear that the Fed's intention is to complete QE2 and then stop. So long as inflation expectations are rising, I would be very surprised to see additional Fed action. (I don't necessarily agree that rising inflation expectations should stay the Fed's hand; I simply think that they will.)And yet, it's too strong to say that the Fed is signaling an end to its easing cycle. It would be more accurate to call the impending end of QE2 a pause. The end of the initial round of asset purchases did not represent the conclusion of the easing process; when global developments undermined expectations in America, the Fed responded. I am sure that the FOMC is keeping a close eye on falling projections for first quarter output and on the potential threats to a self-sustaining recovery represented by Europe, commodity prices, and the global swing toward policy tightening.Meanwhile, the Fed doesn't actually need a lot of lead time before easing again. As we observed last fall, the change in outlook—the signal—does most of the policy work. When Ben Bernanke hinted that QE2 was forthcoming in a speech last August, markets responded immediately and strongly, even though the actual policy announcement didn't occur until November.If the June Fed meeting arrived and the Fed determined that QE3 might be necessary, it could hint as much and the impact would be immediate. Given that the FOMC can influence the economy relatively quickly, there's little reason for Fed officials to indicate that they're doing anything other than what they are, in fact, doing—which is pausing while the sustainability of rising expectations remains uncertain.