Since the release of the minutes of the September 21 meeting of the Federal Open Market Committee (FOMC), there has been growing market expectation that, following its meeting in early November, the FOMC will announce additional monetary stimulus, referred to by many as a second round of quantitative easing, or “QE2.” These expectations have been fueled, in part, by recent speeches by various members and alternate members of the FOMC, including a speech by Federal Reserve Chairman Ben Bernanke on Friday, a Saturday speech by FOMC alternate member Charles Evans (President of the Federal Reserve Bank of Chicago) and a speech yesterday by FOMC alternate member Richard Fisher (President of the Federal Reserve Bank of Dallas).

At the Federal Reserve Bank of Boston’s 55th Economic Conference on Friday, Chairman Bernanke spoke about the importance of monetary policy in a low-inflation environment. Warning that the troubled housing market and the slow rate of private-sector job growth could pose risks for the U.S. economic recovery, Bernanke stated that “[t]here would appear -- all else being equal -- to be a case for further action.” Without providing many details, Bernanke did hint that one “means of providing additional monetary stimulus, if warranted, would be to expand the Federal Reserve’s holdings of longer-term securities.” While noting that the Federal Reserve’s previous program was successful in bringing down long-term interest rates, Bernanke cautioned that the Federal Reserve has little experience in judging the economic effects of more asset purchases. Bernanke stated that another step the Federal Reserve might consider is to strengthen its pledge to keep rates "low for longer than markets expect."

Subsequently, on Saturday, Federal Reserve Bank of Chicago President Charles Evans, speaking at the same conference, said the U.S. is in a “bona fide liquidity trap” and advocated “much more policy accommodation.” Evans said that such policy accommodation could include 1) additional large-scale asset purchases and 2) a statement that policy rates will remain at zero for longer than “an extended period.” Evans further hinted that “price level targeting” could serve as a “complementary policy tool.”

Similar views were expressed yesterday by Richard Fisher, who noted that "given the circumstances of sluggish growth and measured inflation that is too low, I give greater weight to the risk of further disinflation giving way to deflation" and characterized asset purchases as "a form of risk management." In sum, he said he was "leaning in favor of additional monetary stimulus while acknowledging the longer-term risks the policy may present."