Best of the Week
Most Popular
1. Gold vs Cash in a Financial Crisis - Richard_Mills
2.Current Stock Market Rally Similarities To 1999 - Chris_Vermeulen
3.America See You On The Dark Side Of The Moon - Part2 - James_Quinn
4.Stock Market Trend Forecast Outlook for 2020 - Nadeem_Walayat
5.Who Said Stock Market Traders and Investor are Emotional Right Now? - Chris_Vermeulen
6.Gold Upswing and Lessons from Gold Tops - P_Radomski_CFA
7.Economic Tribulation is Coming, and Here is Why - Michael_Pento
8.What to Expect in Our Next Recession/Depression? - Raymond_Matison
9.The Fed Celebrates While Americans Drown in Financial Despair - John_Mauldin
10.Hi-yo Silver Away! - Richard_Mills
Last 7 days
UK Coronavirus Infections and Deaths Projections Trend Forecast - Video - 28th Mar 20
The Great Coronavirus Depression - Things Are Going to Change. Here’s What We Should Do - 28th Mar 20
One of the Biggest Stock Market Short Covering Rallies in History May Be Imminent - 28th Mar 20
The Fed, the Coronavirus and Investing - 28th Mar 20
Women’s Fashion Trends in the UK this 2020 - 28th Mar 20
The Last Minsky Financial Snowflake Has Fallen – What Now? - 28th Mar 20
UK Coronavirus Infections and Deaths Projections Trend Forecast Into End April 2020 - 28th Mar 20
DJIA Coronavirus Stock Market Technical Trend Analysis - 27th Mar 20
US and UK Case Fatality Rate Forecast for End April 2020 - 27th Mar 20
US Stock Market Upswing Meets Employment Data - 27th Mar 20
Will the Fed Going Nuclear Help the Economy and Gold? - 27th Mar 20
What you need to know about the impact of inflation - 27th Mar 20
CoronaVirus Herd Immunity, Flattening the Curve and Case Fatality Rate Analysis - 27th Mar 20
NHS Hospitals Before Coronavirus Tsunami Hits (Sheffield), STAY INDOORS FINAL WARNING! - 27th Mar 20
CoronaVirus Curve, Stock Market Crash, and Mortgage Massacre - 27th Mar 20
Finding an Expert Car Accident Lawyer - 27th Mar 20
We Are Facing a Depression, Not a Recession - 26th Mar 20
US Housing Real Estate Market Concern - 26th Mar 20
Covid-19 Pandemic Affecting Bitcoin - 26th Mar 20
Italy Coronavirus Case Fataility Rate and Infections Trend Analysis - 26th Mar 20
Why Is Online Gambling Becoming More Popular? - 26th Mar 20
Dark Pools of Capital Profiting from Coronavirus Stock Markets CRASH! - 26th Mar 20
CoronaVirus Herd Immunity and Flattening the Curve - 25th Mar 20
Coronavirus Lesson #1 for Investors: Beware Predictions of Stock Market Bottoms - 25th Mar 20
CoronaVirus Stock Market Trend Implications - 25th Mar 20
Pandemonium in Precious Metals Market as Fear Gives Way to Command Economy - 25th Mar 20
Pandemics and Gold - 25th Mar 20
UK Coronavirus Hotspots - Cities with Highest Risks of Getting Infected - 25th Mar 20
WARNING US Coronavirus Infections and Deaths Going Ballistic! - 24th Mar 20
Coronavirus Crisis - Weeks Where Decades Happen - 24th Mar 20
Industry Trends: Online Casinos & Online Slots Game Market Analysis - 24th Mar 20
Five Amazingly High-Tech Products Just on the Market that You Should Check Out - 24th Mar 20
UK Coronavirus WARNING - Infections Trend Trajectory Worse than Italy - 24th Mar 20
Rick Rule: 'A Different Phrase for Stocks Bear Market Is Sale' - 24th Mar 20
Stock Market Minor Cycle Bounce - 24th Mar 20
Gold’s century - While stocks dominated headlines, gold quietly performed - 24th Mar 20
Big Tech Is Now On The Offensive Against The Coronavirus - 24th Mar 20
Socialism at Its Finest after Fed’s Bazooka Fails - 24th Mar 20
Dark Pools of Capital Profiting from Coronavirus Stock and Financial Markets CRASH! - 23rd Mar 20
Will Trump’s Free Cash Help the Economy and Gold Market? - 23rd Mar 20
Coronavirus Clarifies Priorities - 23rd Mar 20
Could the Coronavirus Cause the Next ‘Arab Spring’? - 23rd Mar 20
Concerned About The US Real Estate Market? Us Too! - 23rd Mar 20
Gold Stocks Peak Bleak? - 22nd Mar 20
UK Supermarkets Coronavirus Panic Buying, Empty Tesco Shelves, Stock Piling, Hoarding Preppers - 22nd Mar 20
US Coronavirus Infections and Deaths Going Ballistic as Government Start to Ramp Up Testing - 21st Mar 20
Your Investment Portfolio for the Next Decade—Fix It with the “Anti-Stock” - 21st Mar 20
CORONA HOAX: This Is Almost Completely Contrived and Here’s Proof - 21st Mar 20
Gold-Silver Ratio Tops 100; Silver Headed For Sub-$10 - 21st Mar 20
Coronavirus - Don’t Ask, Don’t Test - 21st Mar 20
Napag and Napag Trading Best Petroleum & Crude Oil Company - 21st Mar 20
UK Coronavirus Infections Trend Trajectory Worse than Italy - Government PANICs! Sterling Crashes! - 20th Mar 20
UK Critical Care Nurse Cries at Empty SuperMarket Shelves, Coronavirus Panic Buying Stockpiling - 20th Mar 20
Coronavirus Is Not an Emergency. It’s a War - 20th Mar 20
Why You Should Invest in the $5 Gold Coin - 20th Mar 20
Four Key Stock Market Questions To This Coronavirus Crisis Everyone is Asking - 20th Mar 20
Gold to Silver Ratio’s Breakout – Like a Hot Knife Through Butter - 20th Mar 20
The Coronavirus Contraction - Only Cooperation Can Defeat Impending Global Crisis - 20th Mar 20
Is This What Peak Market Fear Looks Like? - 20th Mar 20
Alessandro De Dorides - Business Consultant - 20th Mar 20
Why a Second Depression is Possible but Not Likely - 20th Mar 20

Market Oracle FREE Newsletter

Coronavirus-bear-market-2020-analysis

Is the Fed Sorry It Promised QE2?

Interest-Rates / Quantitative Easing Oct 25, 2010 - 08:19 AM GMT

By: Sy_Harding

Interest-Rates Best Financial Markets Analysis ArticleThe Fed has had stocks and gold spiking up since early September, and the dollar plunging, first on hints that it might consider providing another round of ‘quantitative easing’ if the economic recovery continued to worsen, and then practically promising it’s ready to do so.


It was a complete turnaround from earlier in the year, when it was saying the recovery was coming along nicely and it was time to begin removing some of last year’s stimulus programs, to prevent the economy from overheating and causing inflation.

As late as June its statement after its FOMC meeting said, “The recovery is proceeding and the labor market is improving gradually. Household spending is increasing.”

Even in its statement after its August meeting, while it worried that, “The pace of the recovery in output and employment has slowed in recent months,” it didn’t seem too worried, saying, “Nonetheless the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be more modest in the near term than had been anticipated.”

Meanwhile, in all of its FOMC statements this year it had included the assurance that, “The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability.”

When the stock market plunged in its worst August in years, and economic reports worsened further, analysts began asking what ‘policy tools’ the Fed was referring to, since it had already lowered interest rates to near zero, and when the new tools might be employed.

The response was that if necessary the Fed could engage in another round of ‘quantitative easing’ similar to the program it initiated to help pull the economy out of the 2007-2009 recession.

And as markets responded positively to that news, and economic reports continued to worsen, the Fed increasingly hinted it could be ready to pursue such a policy change soon.

Quantitative easing involves buying large quantities of Treasury bonds, with two goals in mind. The first goal is to force long-term interest rates down and perhaps encourage borrowing and spending on big-ticket items by consumers and businesses. The second goal is to lower the interest savers earn on cash and low-risk investments, enticing them into riskier investments in commodities and stocks, thus creating a higher level of inflation that would help ‘inflate’ the economy out of its slowdown.

Since it also involves ‘printing’ more dollars to provide the Fed with the wherewithal to make the large additional bond purchases, it also drives the value of the dollar down. That also helps the economy by making U.S. products less expensive in foreign countries, while making imports into the U.S. more expensive for U.S. consumers, hopefully encouraging more domestic buying of U.S. products.

One downside is that it would significantly increase the massive amount of financial assets already on the Fed’s balance sheet from the first round of quantitative easing in 2008 and 2009, making it all the more difficult for the economy down the road when the Fed has to begin unloading those assets from its books.

It also risks runaway inflation if further easing is not needed but is provided anyway, such as if the economy is going to resume its recovery on its own.

It seems that the Fed no sooner practically assured markets in recent weeks that it will be announcing another round of quantitative easing (QE2) at its November 3rd meeting, than economic reports began improving. Retail sales surprised on the upside, manufacturing has shown signs of picking up, unemployment claims have declined, leading economic indicators were up 0.3% in September for the third straight month, and 3rd quarter earnings reports are including a number of improved outlooks from major corporations.

So, it may be that the Fed was correct during the summer in expecting the economy to slow but not into recession, and then begin to strengthen again.

In which case the Fed may now be wishing it had never mentioned quantitative easing, and particularly that it has almost guaranteed markets that it will provide it.

There were some hints this week that the Fed is at least backing away from the size of any quantitative easing program, which some had previously estimated might amount to more than $1 trillion - and perhaps even backing away from the timing of it.

For instance, perhaps preparing markets for disappointment, St Louis Fed President Bullard said on Thursday that, “No decisions have been made . . . . . If we do decide to go ahead with quantitative easing we could think in increments of about $100 billion . . . and then I think we could give forward guidance at each successive FOMC meeting that would suggest how likely the committee thinks it is that it will continue these purchases.”

Markets this week that have factored in a substantial easing program seemed to wonder if they might be disappointed. Gold tumbled more than $40 an ounce. For the first time since the bottom fell out for the dollar again in early September, it closed up for the week. And even the hot stock market rally ran into unusual up and down volatility, seemingly uncertain about what to expect.

Sy Harding is president of Asset Management Research Corp, publishers of the financial website www.StreetSmartReport.com, and the free daily market blog, www.SyHardingblog.com.

© 2010 Copyright Sy Harding- All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules