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Thursday August 5, 2010 - 20:46:01 GMT
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The Federal Reserve and Quantitative Easing
Ben Bernankeâ€™s very public concern for the strength and longevity of the
US economic recovery is an unequivocal warning that the Fed is ready to
open the quantitative easing tap once again. With the Fed Funds rate
effectively at zero, and government bond returns at historic lows the
Fed has run out of monetary tools to support the economy, that is,
except for quantitative easing.
The $2.3 trillion Fed portfolio contains billions of dollars of soon to
mature mortgage bonds and other assets. The funds from these expiring
bonds can be kept at the Fed, allowing the portfolio and the money
supply to shrink or they can be reinvested in other securities,
preventing the currency stock from declining. By the end of next year
$200 billion in bonds are projected to reach completion. In the context
of at $14 trillion economy and an $8.6 trillion money supply (M2), the
substantive effect on the economy and currency circulation of
reinvestment would be slight. But it would be a powerful signal to the
markets of the Fedâ€™s commitment to support the US economy.
The US M2 money supply had been largely stable from November of last
year to the end of April, averaging a little over $8.51 trillion per
month for that period. Since then it has been steadily rising.
From January through April the money supply averaged a modest 1.45%
monthly decline, (January -7.6%; February 9.0%; March -3.3%; April
-3.9%). In May the supply rose 12.2%, the largest monthly increase since
it vaulted 32.8% in December 2008 at the height of the financial
collapse. In June it added 4.5%. These supply increases coincide
precisely with the slowing of the American economy and the emergence of
doubts about the pace and sustainability of the recovery, not the least
at the Fed itself.
The likely trigger for a QE program by the Fed would be a return to
rising unemployment. The circle from increasing joblessness to falling
home prices and consumer confidence, restricted consumption, economic
contraction and the potential financial and economic effects on a still
weak economy might well prompt the Fed into action, despite its possible
negative effects on the dollar, commodity prices and the funding of the
Whether the Fed announces another QE program at the FOMC meeting next
week probably depends on the July jobs data, to be released tomorrow
at 8:30 am. But the Fed Chairman has made his intention plain.
One thing to remember, when the Fed announced its last quantitative
easing program on March 18th 2009 the dollar lost 3.9% against the euro
and 3.2% versus the yen on the day.
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Tue 19 Dec
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15:30 US- EIA Crude
Thu 21 Dec
03:00 JP- BOJ Decision
13:30 CA- CPI & Retail Sales
13:30 US Weely Jobless
13:30 US- GDP
Fri 22 Dec
09:30 US- GB- GDP
13:30 US- core PCE Deflator & Presonal Income
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Mon 25 Dec
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