Will the Fed announce ”QE 3″ at the next FOMC meeting this month? (Jim Rogers thinks it’s already underway.)
While the market reaction Friday and many of the media headlines suggest that this is virtually a foregone conclusion, caution in assuming such makes sense to me. A much-ignored part of Ben Bernanke’s address at Jackson Hole two days ago, discussed below, offers support for an agnostic approach. The political timetable at home and, importantly, the ongoing inflationary European solution to its recession/debt mess also are restraints on an immediate resumption of Large Scale Asset Purchases (LSAP, the means by which quantitative easing is implemented).
After all, the recessionary and insolvency fires are burning in Europe, not the U.S. Spain is inexorably going the way of Ireland and Portugal toward a full-fledged bailout, which “should” mean that it will go into receivership and be given economic terms by Brussels, Frankfort and perhaps Washington (IMF); only the timing and details are to be determined (so say I and many people more knowledgeable than I). The next likely battleground in Europe is Italy, but a report out this past week suggests that an already-forgotten “bail-ee”, Portugal, may need its loans restructured yet again, so let’s not assume that what’s in the past is truly “fixed”:
Separately, Portugal’s tax revenues fell 3.5pc in July despite higher tax rates, raising concerns that the country is tipping into a contraction spiral. It is now certain that Portugal will fail to meet this year’s deficit target of 4.5pc of GDP under its €78bn rescue from the EU-IMF troika. Morgan Stanley said the country will need a “second bail-out” in the autumn.
The latest Italian economic statistics are dismal. Italy is likely to be in traders’ crosshairs (pending dramatic ECB action to forestall that). China’s economy has also slowed significantly. Both Europe and China are suffering stagflation, which limits policy choices.
In the above context, the gigantic and probably unprecedented (since WW II) yoy declines in housing prices in the Netherlands suddenly make more sense. After all, 80% of Dutch GDP is from… exports. Exports to which country? Germany and the U.S.? Not enough. The Dutch may be - given the global slowdown they did not plan for. From the WSJ:
AMSTERDAM—The slump in the Dutch housing market deepened in July as prices posted the steepest drop on record, highlighting the challenges facing the Netherlands ahead of next month’s general elections.
With prices now plumbing levels last seen in 2004, the downturn is weighing heavily on household consumption and has raised concern about the country’s huge mortgage debt pile, among the largest in Europe
House prices fell 8% from a year earlier, statistics bureau CBS said Tuesday, the largest decline in the 17-year history of the agency’s house-price index. Prices fell 4.4% in June and 5.5% in May.
Et tu, Holland?
The die may thus be cast for a major money-printing effort from the ECB, perhaps as soon as the German Constitutional Court (presumably) finds for the central planners on September 12 in a long-awaited decision about whether the European Stability Mechanism is legal under German law.
Assuming that the ECB once again creates new money, we could see the Fed “print money” as it did last fall when the ECB introduced the LTRO. This is a form of QE under a different name. To wit, the Fed could lend (“swap”, in central banker lingo) dollars (newly-created ones) to the ECB so that the lightly-capitalized ECB could then send create new euros with these borrowed, newly-created dollars. The ECB would send these new euros where it believes they are needed within the eurozone. Some of said newly-created euros, funded with newly-created dollars by the Fed, would undoubtedly find their way back to the U.S. markets and economy, thus providing “support” domestically. But it would not be “QE”. However, in conjunction with the extended, ongoing Fed “Operation Twist” (aka Let’s Twist Again, as we did in the summer of ’62), the combined effect at home could be just as “stimulative” as a formal QE 3.
The case for more money-printing in the eurozone is not clear-cut, though. Brent crude prices and gold are at or near record prices there already. The eurozone has both an unemployment problem and a price inflation problem. It is already back to the ’70s for Europe, with negative interest rates and high unemployment once again. So we shall just have to see what occurs there, and when.
The U.S. also has a price inflation problem, especially in the most visible prices, those which hurt the middle and lower classes (i.e., almost everyone) the most. Gasoline prices are 6-10% above where they were just a month ago. The trajectory of food prices was upwards before the drought. Futures traders would likely bid prices of sensitive commodities a good higher if they were convinced that a major new QE were about to get underway; that is assuming that they are independent and that no other important countervailing factors come into play, such as Israel and Iran springing a freshly-signed peace treaty upon an unsuspecting world.
If the Fed wants to put President Obama’s re-election campaign behind the 8-ball, announcing a new QE when prices are already surging in the two most visible types of expenditures, food and gasoline, that voters see almost daily is a good way to do so. Also, announcing a new QE would clearly state that the Fed sees no economic light at the end of the tunnel despite all it has done and all the deficit spending the Obama administration has approved, thus further undermining the Obama campaign’s assertion that the “Bush economy” is finally healing.
Thus I think that there are good policy and political reasons to expect the Fed to sit tight a at least a little longer.
As the Chairman stated at Jackson Hole Friday:
In sum, both the benefits and costs of nontraditional monetary policies are uncertain; in all likelihood, they will also vary over time, depending on factors such as the state of the economy and financial markets and the extent of prior Federal Reserve asset purchases. Moreover, nontraditional policies have potential costs that may be less relevant for traditional policies. For these reasons, the hurdle for using nontraditional policies should be higher than for traditional policies. At the same time, the costs of nontraditional policies, when considered carefully, appear manageable, implying that we should not rule out the further use of such policies if economic conditions warrant.
He has been walking, and talking, a fine line indeed. I have bolded some parts of the above for discussion purposes.
The first bolded phrase implies that QE 1 was highly effective and safe, given that it was the first one. The patient (the economy) was in monetary drought conditions; the Fed watered it. Now, following QE 2 and the ongoing “Operation Twist”, which the Fed views as having at least half the stimulative effect as QE, the patient may be well-hydrated, and more water might just create a soggy mess that might make matters worse or at least have no net positive effects to be worth the trouble of another QE.
The second and third bolded phrases may be more important. GDP reportedly has been growing faster than population; the establishment survey by the BLS has been showing positive wage growth; chain store retail sales for August were released Thursday and were much better than expected, even boom-y. So, do economic conditions warrant? The consensus last summer was that they so warranted, yet no QE ensued then. The stock market is higher, commodities prices are moving up and not down; why print now if not last summer?
Of course the Fed not only knows all of the above, it has vastly more access to up-to-the-minute information than do I. Maybe something is brewing that it knows that tells it that the U.S. is actually in a new, undocumented recession; but there has been no hint of that from the Fed that I am aware of.
Thus my humble hunch is that the Fed is probably on hold for a formal domestic QE and would like to be so until after the election, barring a drastic change in financial and economic conditions in the United States.
My further guess, perhaps even less mainstream especially in certain circles, is that Chairman Bernanke would prefer not to engage in quantitative easing ever again, meaning that he hopes that now and in the future that the high hurdle he cited for the use of unconventional monetary policy never be reached again, and certainly not in his tenure. “Hopes” is the operative word; of course another helicopter drop will occur pronto if “needed”. His high hurdle is definitely able to be jumped over.
Gold, oil, and stocks were all up in price in the U.S. markets last Friday; but bonds also rose in price (fell in yield). One of those was wrong. On the futures boards tonight, the inflationary surge is underway, yet bonds have not sold off. Does Mr. Bond know something, or is it acting this way because of Fed manipulation or fear/expectations of the same?