Fed launches QE-lite
In a compromise, the Federal Open Market Committee (FOMC) has approved a cautious and conservative second round of quantitative easing (QE2) which may satisfy nobody but should prevent internal splits from widening.
It is designed to provide some marginal stimulus to asset markets and economic recovery without further undermining the confidence of foreign investors.
The best way to characterize the $600 billion bond-buying program implemented over eight months is “QE-lite”. The total is slightly higher than expected, but spread over a slightly longer period. The Fed has done almost exactly what it signaled over the last few weeks — no more (there was no “shock and awe”) and no less.
There is an implicit commitment to continue buying securities until the end of June 2011 and to buy $600 billion in total but the figures are described as an intention, so they could be varied in response to changing conditions.
The committee preserved its flexibility by promising to “regularly review the pace of its securities purchases and the overall size of the asset-purchase program in the light of incoming information and will adjust the program as needed”.
Supporters of large-scale, open-ended asset purchases will note there is no finite end to the program. The committee pledged to continue employing all the policy tools at its disposal “as necessary to support the economic recovery and ensure that inflation, over time, is at levels consistent with its mandate”. It was the Fed’s equivalent of “all necessary means”.
Opponents will be relieved the committee has only sanctioned $600 billion so far, a relatively moderate amount. The regular review means even this could be halted early or scaled back if conditions improve or inflation and commodity prices start to accelerate too much.
Fed is split but QE2 looks a done deal
- The opinions expressed are the author’s own-
FOMC meetings are usually a strange combination of formality and easy-going familiarity but levity may be in short supply this week. The Fed’s institutional credibility is on the line, and the normal decorum that characterizes relations among committee members has become increasingly strained over the summer.
Divisions between proponents and opponents of a second round of quantitative easing (QE2) have been on display as never before. It is not clear what members will say to one another to fill two days since all the arguments have already been rehearsed in detail and in public over the last six weeks.
In a thinly veiled swipe at his colleagues, Kansas City Fed President Thomas Hoenig has stumped around his patch on the Great Plains denouncing QE as a “dangerous gamble” and “a bargain with the devil”.
Dallas Fed President Richard Fisher and Philadelphia Fed President Charles Plosser have made no secret of their skepticism or outright opposition to launching QE2 at this point. Minneapolis Fed President Narayana Kocherlakota has questioned whether it will work. Richmond Fed President Jeffrey Lacker has seemed to doubt whether it is necessary.
In contrast, the New York Fed (always the closest to the major money centre banks) and the St Louis Fed (the spiritual home of monetarism in the Federal Reserve System) have openly campaigned for the benefits of a second round of asset purchases.
The final vote to adopt QE2 looks set to be 10-1 (with Hoenig dissenting). But the tally will mask much wider misgivings among the non-voting regional presidents and perhaps among some members of the Board of Governors itself, who will nonetheless fall in line with the chairman to support his authority.
“I think in late 2011 or 2012 we will look back on QE2 and either say “what a good idea” or “boy was that dumb”.
Not a chance, you know what the average American will be saying then?
“Waa waaa waaa!” followed by “how do we deal with this In a forward looking fashion?”
Right now, how many people are truely saying “3 trillion in new spending was really dumb”?
None. & 90% don’t even know that we have FNMA and FRE in conservatorship, and monitized their debt of 14trillion+. They’re always looking to fix a problem using the new “future plan” when all the answers are right there by analizing the past. History will repeat itself again. The federal govt knows clearly that their only escape is to massively devalue the dollar. Big suprise there. Been going on expotentially since 1964 ( & 1913 by some accounts)
$160 for 2 burgers w/drinks by 2015
Quantitative easing and the commodity markets
-The views expressed are the author’s own-
A warning by an International Energy Agency (IEA) analyst this week that quantitative easing (QE) risked inflating nominal commodity prices and derailing the recovery drew a withering response from Nobel Economics Laureate Paul Krugman, who labelled the unfortunate analyst the “worst economist in the world”.
According to New York Times columnist Krugman “Higher commodity prices will hurt the recovery only if they rise in real terms. And they’ll only rise in terms if QE succeeds in raising real demand. And this will happen only if, yes, QE2 is successful in helping economic recovery”.
Krugman’s criticism is unfair. There are clear links between QE and investor appetite for commodity derivatives and physical stocks (via the Federal Reserve’s “portfolio balance” effect), and from investors’ holdings of derivatives and physical inventories to cash prices (given the relatively inelastic supply and demand for raw materials in the short term).
In other words, there are financial as well as real economy links between QE and commodity prices. Commodities have some of the characteristics of financial assets as well as physical consumption materials. Via portfolio effects, QE could boost the relative (real) price of commodities even if it did not boost employment and output in the United States by very much.
It is a more open question whether commodity-driven inflation would hinder or promote a recovery in output and employment in the advanced industrial economies. It would reduce the real burden of inherited debts from the boom years. But it would harm savers, and it might harm manufacturers and households, depending on whether increased commodity prices were matched by rising non-commodity consumer prices and wages.
Overall, an unbalanced, commodity-driven inflation would probably be more of a drag on recovery than a help. Reasonable observers have reached different conclusions. In any event, the analyst’s warning was certainly not a “classic freshman mistake” or evidence of a new “Dark Age of economics” that the erudite professor labelled it.
Central banks tend to use quantitative easing when interest rates have already been lowered to near 0% levels and have failed to produce the desired effect. QE always favor all the commodity investments with low risk matter. Higher QE, higher commodities inventories.
http://www.mikeastrachan.com/
Bernanke should be fired……. yesterday!