Counterparties: Is QE3 working?
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Last week, noted inflation hawk and Minneapolis Fed President Narayana Kocherlakota changed his tune and spoke out strongly in favor of keeping interest rates extraordinarily low until at least mid-2015. Now, the president of the Philadelphia Federal Reserve, Charles Plosser, has joined his Dallas counterpart in criticizing the Fed’s latest round of monetary stimulus:
I do not believe that lowering interest rates by a few more basis points will spur further growth or higher employment. Business leaders who have talked to me continue to cite uncertainty about fiscal decisions — here and abroad — as the greatest hindrance to hiring and investment … the central bank can do little to alleviate them.
And as far as households are concerned … They are deleveraging and saving more. It seems unlikely that a small drop in interest rates will overturn the strong desire to save and, instead, induce households to spend more. In fact, driving down interest rates even further may encourage consumers to save even more to make up for lower returns.
Adam Davidson joins Plosser in diagnosing rising savings and a lack of household spending as a key dynamic holding back the economy. Ultimately, though, he comes down on the side of monetary action, despite the risks of unintended consequences. Similarly, Tim Duy doesn’t believe the severity of the crisis should be an excuse for inaction. “Bottom line,” he writes, “policy is effective even in the aftermath of a financial crisis. Don’t let policymakers fool you into believing otherwise”.
The Washington Post’s Neil Irwin plays QE3 professor and gives Dr Bernanke an A- on inflation expectations but only a C+ on mortgage rates. The problem, Irwin writes, is that markets had already priced QE3 into mortgages rates. Now banks are “cutting the mortgage rates they charge customers only gradually; if the banks slashed rates too fast, they would be overwhelmed by the demand from Americans looking to refinance or buy a home and would not be able to handle the load”.
QE3 is also weakening the dollar relative to the euro, according to Barclays’ research team. But that’s not necessarily a bad thing: It makes US products more attractive on the global market. President Obama is unlikely to meet his goal to double exports by 2015 so long as he’s presiding over a strong dollar. And, as Ezra Klein has pointed out before, the Fed knows that “although in the long run, a healthy, productive economy will lead to a stronger dollar, getting there probably requires a temporarily weaker dollar”. – Ben Walsh
On to today’s links:
Healthcare costs are once again growing faster than the economy – WaPo
Those crazy young people responded to the financial crisis by saving more – WSJ
Lagarde: the world’s central banks are sending “big policy signals in the right direction” – IMF