Much was made of the July 31 FOMC meeting minutes yesterday noting that “many” of the members think more QE may be necessary if economic conditions do not improve. In fact however this wording is not a surprise in the sense that 8 of the 10 voting members on the FOMC are considered “doves” who have a constant bias toward more easing. So there is nothing new here, 80% of the committee are always in favor of more intervention.
More important I think, is that since the July 31 meeting traders have ramped up stocks and key commodity prices (ie food and energy) in anticipation of further monetary ease. This also caused a sell-off in treasuries and the commensurate spike in borrowing costs. These Pavlovian responses in market prices present the Fed with a problem now since $4 gas prices, $8 wheat and higher mortgage rates are serious blows to the spending ability of weak consumers. Spiking subsistence costs are an even greater wallop in developing countries. Note: Chinese factory activity slumped to a nine-month low in August against expectations of a modest pickup. These are constraints on the global economy that were not as pronounced at lower prices 4 weeks ago.
In effect then, just considering more QE, the central bankers have further harmed the economy over the past month. If the Fed rolls out more in September this will only poison the patient further. As we have explained for some time now, more easing is now only lose-lose. Which means toppy stock prices have some ‘splainin’ to do in the weeks ahead.