5 REASONS QE3 IS OFF THE TABLE
By Walter Kurtz, Sober Look
The third round of quantitative easing (QE3) by the Federal Reserve appears completely unlikely at this stage. Here are the reasons:
1. PPI ex-food/energy, a leading indicator for CPI which is monitored closely by the Fed, has been rising at a decent clip with the latest number at 3% year-over-year. This will make the FOMC think twice about injecting additional liquidity.
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| PPI ex food and energy YOY (Bloomberg) |
2. Capacity utilization, though low by historical standards, has been growing. The latest number is quite strong, particularly excluding utilities which are operating below capacity due to warm weather. In fact manufacturing output increased 0.9% m/m in December.
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| Capacity utilization relative to 2007 (source: the Fed) |
3. Whether by design via “operation twist” or due to flight into treasury markets because of the European concerns, the Fed got their desired result of flattening the treasury curve. The flattening in the last six months has been quite sharp.
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| US treasury curve move in the last 6 months (Bloomberg) |
That curve flattening in turn brought down mortgage rates considerably. Incremental outright asset purchases will accomplish little in that regard.
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| 30y mortgage rate (Bankrate.com) |
4. It is not clear that quantitative easing has a meterial impact on broad money aggregates. The chart below shows the M3 aggregate as calculated by Capital Economics (the Fed no longer computes that number). QE2 was started in November of 2010, when M3 growth was already climbing off its lows. And in spite of tremendous injection of liquidity into the system, M3 growth continued to lag materially the narrower money aggregates.
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| Source: Capital Economics (* M3 is their calculation, not the Fed) |
5. QE3 is the last “bullet” of any consequence the Fed currently has in its arsenal. With short-term rates locked in at zero for two years and mortgage rates at historical lows, the impact on the US economy from additional liquidity will be minimal if not negative. Therefore the only time the Fed would consider using its last bullet is if we experience a global credit crisis such as a sudden default of a major EU financial institution or a large eurozone sovereign. And the eurozone and the ECB have proven that they will simply not allow for that to happen.
Cullen – it looks like you drove off the Marxist MMTers by focusing on the markets. All that’s left are Market MMTers. Nice.
My (MMT’ ish) take on why there won’t be a QE3:
Fool me once: shame on you.
Fool me twice: shame on me.
Fool me three times: ….Well….
There’s no common wisdom to fall back on in this case, because it almost never happens in the real world. Only a rare idiot gets fooled three times.
We may not have a QE3 yet, but the UK already has QE forever. With its extraordinary high levels of financial sector debt, I think the UK is an accident waiting to happen.
http://theautomaticearth.blogspot.com/2012/01/january-16-2012-quo-vadis-britannia.html
I would not be surprised if the UK banks go kablooey while everyone is watching Greece.
Excellent observation. US and Europe are too big… UK is not and YES they can QE forever and they will, because the economy is pretty dead. BOE is the ONLY one buyer on long term securities. Alarming ? Betting against the pound can be the next favourite sport. Mr. Cameron is not sleeping well.
QE3 is a given it looks like and these statistics likely mean pretty much nothing.
QE3 will be the response to what the ECB likely will be forced into.
The dance has begun, and no acronym-description of monetary theories is gonna save us…
Spend the $$ while it’s worth it! lol.
This article may explain why QE3 is not probable in the very near-term, but I think Cullen’s forward-looking assessment of inflation still keeps QE3 on the table for later in the year.
http://pragcap.com/where-is-inflation-headed-2
I don’t know. Mainstream economists and commentators (Yahoo, CNBC, etc…) all say that QE3 is almost certain, and that it will be massive – $1 Trilion worth of MBS in 2012 alone. It almost sounds like they have inside info. I don’t, but I happen to agree with them anyway. It is an election year, Obama wants to announce his massive multi-Trillion $ F/F refinancing plan about 3-4 months before the election, and Bernanke has every incentive to accommodate Obama because the Republicans have all declared that they would not reappoint Bernanke. Thus the politics says that QE3 is certain to happen.
Notice that Hilsenrath hasn’t said it.
When they want people to think there will be QE when there actually won’t be QE, they send out the Fed doves to give lots of speeches and interviews to get everyone talking QE. That slows down the rise of the dollar without QE.
When the Fed actually intends to do something, Hilsenrath lets everyone know.
The Fed’s mandates of price stability and full employment will be carefully weighed….and full employment will carry more weight. And then when the EuroLand banking system has it’s next volatility quake the FOMC will have the votes (and a little poltical cover) for QE3 as the slowdown hits global markets.
I say around early Q2. Question is asset mix and size of asset mix.