FRIDAY, SEPTEMBER 14, 2012
The Fed’s QE3: No Exit
The Fed’s launch of QE3 looks more than a tad desperate. If you believe the central premise of the Fed’s action, that propping up asset price gains would have enough effect on consumptions to lift the economy out of stall speed, it would seem logical to sit back a bit and let the recent stock market rally and the (supposed) housing market
recovery do their trick. But the Fed has finally taken note of the worsening state of the job creation in an already lousy employment market and has decided it needed to Do Something More.
So the Fed is going to push the housing button harder, with $40 billion a month of mortgage backed securities purchases, along with a continuation of Operation Twist. Thi’s is less aggressive than past turns on the QE spigot; Ambrose Evans-Pritchard called it “calibrated”. The central bank depicted the commitment as open ended, but since it also promised to keep rates super low “at least through mid-2015,” Mr. Market expects the QE tap to remain on at least that long.
Now arguably, this move is a hedge against the slowdown in China, Europe, and the contractionary effect of failing to shrink the fiscal cliff. But QE weakens the dollar and gooses commodity prices (as confirmed by big moves in gold, silver, and oil on Thursday). The last thing Europe needs now is a stronger euro. With food prices already up sharply (note that while the USDA is now forecasting that the corn harvest will be only slightly below last year’s levels, rice output has also fallen) and previous rounds of QE having led to bitter complaints of its effects on commodity prices, any additional pressure on staples like food and fuel prices aren’t just unwelcome, they are politically destabilizing.
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