Certain Federal Reserve Members Questioning Cost/Benefit of Continued Quantitative Easing

Late last week, the release of the minutes from the Federal Reserve’s December meeting created numerous headlines and contributed to the Treasury bond selloff that was already underway.  Several members questioned the cost/benefit relationship of continued asset purchases, and some saw these purchases ending by the middle of this year.  While the market took this commentary as bond bearish, we remind our readers that the Fed, like us, is dependent on economic data when making decisions, and it is the data that will drive its decision whether or not to continue with monetary easing.  It is also interesting to note that, in past speeches and press conferences, Chairman Bernanke has encouraged the market to focus on the overall size of the Fed’s balance sheet, and not necessarily on its flows.  With the Fed’s balance sheet at record levels, it is safe to say that monetary policy accommodation will be here for quite some time.  We believe that, for purchases to actually end by June, economic activity will need to pick up substantially from current levels.  The nonfarm payrolls report on Friday, which showed a gain of 155k, along with manufacturing and services reports last week that showed modest expansion, indicate the economy is growing, but not at levels strong enough to warrant the Fed taking away the punch bowl, yet.