It concerns me that liquidity is omnipresent on bank and corporate balance sheets, and yet it is not being used to hire American workers.

It also concerns me that the most recent Lipper/AMG financial market data show year-to-date flows into virtually all asset classes except money market funds. The flows are strong into every category: high-risk to low-risk bond vehicles, taxable and nontaxable, domestic and external, fixed and floating rate, and, of course, commodities. Margin debt remains shy of 2007 highs but is fast approaching levels that prevailed before the NASDAQ implosion in 2001; in fact, margin-account debit balances as a percentage of the market capitalization of the S&P 500 now exceed the precrash level of 1987 and 2001.

Junk yields are at their lowest levels since October 2007. And the leveraged buyout market is back to paying 2006 levels of EBITDA (earnings before interest, taxes, depreciation and amortization) of 6 to 8.5 times, with the recent announcement of Carlyle Group’s reported 11 times EBITDA purchase of Syniverse Holdings echoing the peak of the precrash craze. As you know, buyout people do not typically acquire companies with a plan to expand the workforce, but instead with an eye to tighten operations, drive productivity, rejigger balance sheets and provide an attractive payback, usually in shorter time than under normal corporate horizons. And the corporations I talk to that are eyeing possible acquisitions with their surplus cash and ready access to the credit markets are not given to thinking of strategic acquisitions as a way to expand payrolls.

In sum, scanning the business landscape and the conditions of the financial markets, I concluded as a golfer that the greens are playing very fast and must be approached with great caution. At a minimum, I concluded, the committee would need to be very careful in how we calibrated our next strokes, lest we overplay it.

I fully understand the theoretical impulse to drive long-term interest rates to lower levels in hopes of stimulating loan demand and challenging the propensity for economic actors to hoard rather than invest. Given that foreign exchange markets react to interest rate differentials between countries, one effect of engineering lower rates would be to devalue the dollar, presumably to create demand for exports. The ultimate objective would be to advance final demand, generate employment for American workers and revive output.

In sum, I asked that the FOMC consider that we might be prescribing the wrong medicine for the ailment from which our economy is suffering. Liquidity and abundant money are not the binding constraints on the economic activity we wish to see. The binding constraints are uncertainty about income and future aggregate demand, the disincentives fiscal and regulatory policy impose on ridding decisionmakers of that uncertainty, and the reluctance, given those disincentives, of those who have the power to create jobs for our people to invest in undertakings that would create them.

The remedy for what ails the economy is, in my view, in the hands of the fiscal and regulatory authorities, not the Fed. I could not state with conviction that purchasing another several hundred billion dollars of Treasuries—on top of the amount we were already committed to buy in order to compensate for the run-off in our $1.25 trillion portfolio of mortgage-backed securities—would lead to job creation and final-demand-spurring behavior. But I could envision such action would lead to a declining dollar, encourage further speculation, provoke commodity hoarding, accelerate the transfer of wealth from the deliberate saver and the unfortunate, and possibly place at risk the stature and independence of the Fed.

My perspective, as with those of all other members of the FOMC, was given a thoughtful and fair hearing at the table. After deliberation, the majority of the committee concluded that under current and foreseeable conditions, the better approach was to purchase $600 billion in Treasuries between now and the end of the second quarter of next year, on top of the amount projected to replace the paydown in mortgage backed-securities. The math of this new exercise is readily transparent: The Federal Reserve will buy $110 billion a month in Treasuries, an amount that, annualized, represents the projected deficit of the federal government for next year. For the next eight months, the nation’s central bank will be monetizing the federal debt.

This is risky business. We know that history is littered with the economic carcasses of nations that incorporated this as a regular central bank practice. So how can the decision made last Wednesday be justified?

Easing of monetary policy produces its maximum impact on real variables in the economy, including output, consumption, and investment, with a lag of six to 12 months and can be difficult to disentangle.

This sense out there, that quantitative easing or asset purchases, is some completely far removed, strange kind of thing and we have no idea what the hell is going to happen, and it's just an unanticipated, unpredictable policy—quite the contrary. This is just monetary policy.

As reported by the Wall Street Journal

This approach eased financial conditions in the past and, so far, looks to be effective again. Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action. Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.

The structural change that has taken place in the U.S. economy since the height of the financial crisis will take time to set in... stoking change with monetary policy is a "bargain with the devil."

- Thomas Hoenig, in response to audience questions following a speech at the University of Kansas

There's a lot of momentum and support to do something," Christopher Waller, director of research at the St. Louis Fed, told Reuters in an interview.  "It's just how huge, and is it going to be time-dependent or state-dependent. ... The likelihood we do something is probably pretty high," he said.

...

"There's a lot of credibility to it that if we were going to (move) the fed funds rate 25 basis points meeting to meeting ... that's kind of like a $250 billion purchase intermeeting," Waller said. "The only thing that's tempering that number back for us is we're worried about the optics of that in terms of monetizing the deficit."

As reported by Reuters

“If we do decide to go ahead with quantitative easing, I think there is a good program we could adopt, one I like, which is to think in units of $100 billion between meetings” of the Federal Open Market Committee, Bullard said today at a conference hosted by the district bank.

“We could give forward guidance for the next meeting that would suggest how likely the committee thinks we would continue these purchases.”

As reported by Bloomberg News

For a competing perspective from the St. Louis Fed's research director the following day, click here.

The first effect of QE is that it represents another form of forward guidance about the path of the fed funds rate. It is a way for the FOMC to signal—in a perhaps more striking way—that it plans to keep the fed funds rate low for an even longer time to come.

It doesn't make sense to do a small portion of QE... It has to be enough to make a difference. Something along the lines of $100 billion a month would be in range.

My conclusion from [the work of Gagnon, Raskin, Remache, and Sack] is that the [2009 and early-2010] LSAP reduced the term premium on 10-year Treasury bonds relative to 2-year Treasury bonds by about 40-80 basis points (on an annualized basis). This fall in term premia led to a slightly smaller fall in the term premia of corporate bonds.

These estimates are extremely useful benchmarks. My own guess is that further uses of QE would have a more muted effect on Treasury term premia. Financial markets are functioning much better in late 2010 than they were in early 2009. As a result, the relevant spreads are lower, and I suspect that it will be somewhat more challenging for the Fed to impact them.

“The risk of double-dip recession has probably receded some in the last six to eight weeks," Bullard said today in an interview with CNBC. "The economy has slowed, but it hasn’t slowed so much that it’s an obvious case to do something. A very reasonable decision would be to say, ‘maybe we should push it off a meeting or two and see how the data comes in.’

...

Bullard said the next Federal Reserve meeting on Nov. 2-3 will be an analysis “blizzard” and the decision will be a “tough call.” 

“I will go into the meeting with an open mind and you don’t want to prejudge these things,” he said. While the case for more stimulus isn’t a “slam dunk,” if the situation calls for it, “we’ll have to take action,” he said.

(Editor's note:  Click here for CNBC's take on Bullard's "not a slam dunk" comment some months later.

Question:  What is your view of the James Bullard (St. Louis Fed president) approach to asset purchases, the idea of some kind of state contingent asset purchase program, as opposed to some kind of shock and awe type program?

Evans: I’m favorably disposed toward the approach that Jim has mentioned… I just think that far more accommodation is required.

I do think that the additional purchases -- although we don’t have precise numbers for how big the effects are -- I do think they have the ability to ease financial conditions

Some research studies have estimated that the effects of the earlier expansion of our securities holdings by just over $1.5 trillion lowered longer-term Treasury yields by about 50 basis points through this portfolio balance channel.  These effects on Treasury yields appear to have been transmitted into lower rates on private credit instruments and higher asset prices more broadly.

...

If the market were to begin having trouble digesting that prepayment risk, the spread between MBS rates and Treasury yields could widen. A significant widening of MBS spreads to Treasuries, whether due to this or other factors, could affect policymakers’ decisions about which assets to purchase. The Chairman’s speech in Jackson Hole and the August FOMC minutes both indicated that reinvesting in MBS rather than Treasury securities might become desirable if market conditions were to change.