The Fed, QE3 and Jobs
By Lance Roberts, StreetTalk Advisors
Spent the morning with Kelly Evans and Beccy Meehan discussing my views on the upcoming FOMC meeting this week. For the markets it really is a “do or die” scenario as recent run up in prices has everything to do with more injections from the Fed considering that fundamental and economic numbers are not supportive of asset prices at these levels.
My view on the Fed meeting can be summarized into these points:
- QE programs targets asset prices. By pushing asset prices higher the Fed hopes to lift consumer confidence to support the economy. With asset prices already at their peak there isn’t much return on a futher program at this point.
- Interest rates are already near their historic lows – further QE unlikely to lower rates enough from here to provide much benefit.
- QE has nothing to do with employment – that is Fiscal policy and Bernanke knows this.
- QE is inflationary, gas and food prices already high, which impacts consumer spending. Further QE at this point is risky.
- QE has diminishing rates of return. This is likely the Fed’s last shot – so it is likely the Fed will keep QE for when the economy is close to recession or some systemic is looming. There are only a finite number of bonds that the Fed can acquire so moving to soon could be detrimental to being able to act when really needed.
Therefore, it is my best guess that at the conclusion of the Fed meeting this week that the Fed will discuss the following:
- Continued concerns about the strength of the recovery and employment.
- Continued request for fiscal action from Congress to support monetary policies.
- A restatement of the Fed’s willingness to provide accommodative policies if necessary.
- Interest rate policy extended through 2015
- Lower rate on excess reserves to 1/8th percent down from 1/4 percent.
For More Reading:
Employment – Worse Than It Looks
The Incredible Lightness Of “Hope”
4 Comments
Lance, very good points in a good article. I think it may be possible for the Fed to influence the 30 yr mortgage rate (related to 30 yr T-bond rate) to go another 25 to 40 basis points lower, but admittedly that is a stretch. It may not stop Ben from trying. What do you think will be accomplished in the real economy by this move: ■Lower rate on excess reserves to 1/8th percent down from 1/4 percent?? Thanks
Fed likely to risk QE only if private sector deleveraging resumes — to neutralize the deflationary effect of credit contraction. Then inflation risks are low.
I’ll bet Bernanke lowers or eliminates IOR to see what happens.
“With asset prices already at their peak there isn’t much return on a further program at this point.”
My guess is that Ben believes he can lift stock prices by raising inflation expectations to encourage a flight to real assets.