If conditions deteriorate further, I believe the answer is yes.
Tim Duy is discouraged that the Fed has given up on trying to reduce the output gap, noting in particular the speech by Federal Reserve Bank of Kansas City President Thomas Hoenig last Friday. But what caught my eye in Hoenig’s remarks was this:
The recovery is proceeding as many economists earlier this year outlined that it would. It is a modest recovery, with mixed results. Yet, GDP is likely to expand at somewhere around a 3 percent rate through the remainder of the year.
And here’s what Hoenig considered to be the most important part of his message, if we can judge by what was included in his dissenting opinion to the Fed’s August 10 FOMC statement:
Voting against the policy was Thomas M. Hoenig, who judges that the economy is recovering modestly, as projected. Accordingly, he believed that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted and limits the Committee’s ability to adjust policy when needed. In addition, given economic and financial conditions, Mr. Hoenig did not believe that keeping constant the size of the Federal Reserve’s holdings of longer-term securities at their current level was required to support a return to the Committee’s policy objectives.
There was much more in Hoenig’s speech that one might choose to debate, but my inclination is that a key issue here is one of facts, not ideology. Either U.S. GDP growth for 2010 will end up above 3%, or it won’t. And if, as many analysts fear, it won’t, then I would expect Hoenig and the rest of the FOMC to respond.
Certainly Federal Reserve Bank of St. Louis President James Bullard is trying to communicate that the Fed needs to respond more if disinflation continues:
There has been disinflation. It has been at the low end of where I’d like to see it. For that reason I think we should supplement our quantitative easing program if we get further developments on that front. We should have a plan in place to take action if it moves lower.
My expectation is that Hoenig’s forecast will prove optimistic, and that last week’s modest easing is not the last we’re going to hear from the Fed.