The inevitability of QE

A swan dive in commodity prices followed by the latest stock market correction has investors talking about the ‘D word’ once again. References to deflation abound in the news while economists seriously discuss the possibility of a global economic recession. What, they ask, will it take to arrest the slowdown in the euro zone and China and prevent its coming to U. S. shores? Why central bank intervention, of course!
One of the dominant themes of 2014 has been the unwinding of the U. S. Federal Reserve’s QE stimulus measure. After purchasing as much as $85 billion worth of long-term Treasuries and mortgage-backed securities per month in 2013, the Fed was scheduled to end asset purchases this month. With the revival of deflation fears, however, there has been some talk among Fed members that perhaps it would be wise to delay the end of QE. Considering that the QE tapering process has clearly had a negative impact on stocks and commodities, as well as the real estate market, the suggestion to extend QE further is being seriously considered.
While there have been many negative headline events this month that have been blamed on the September-October stock market decline – ranging from overseas economic concerns to unrest in Hong Kong and Ukraine to Ebola – the real reason for investors’ worries can be boiled down to one major concern, namely liquidity. (Remember the old Wall Street mantra: when it comes to the stock market it’s all about ‘liquidity, liquidity, liquidity’).
The selling panic started just as the Fed was putting the final touches on phasing out QE. While economists were convinced the market would be able to stand on its own two feet without the benefit of QE, investors were far less certain. Adding to the concerns of U. S. investors were recent actions (or inactions) by the heads of Europe’s and China’s central banks which suggested that both regions weren’t committed to pursuing further monetary stimulus. Those concerns have recently been allayed by statements by central bank chiefs in the last couple of days.
Last week, James Bullard, head of the St. Louis Fed, said the Federal Reserve should continue with asset purchases and thus extend QE until the U. S. economy shows more strength. ‘We can go on pause on the taper at this juncture and wait until we see how the data shakes out into December,’ Bullard told Bloomberg Television. ‘Delaying the taper is something we could do right now that could buy us a little time.’
Not everyone at the Fed agrees with Bullard, however. Boston Fed President Eric Rosengren suggested that when the Fed meets for its Oct. 28-29 policy meeting it likely will maintain its original intention of ending QE at that time. ‘The [QE3] program was really designed that once we made substantial progress on the unemployment rate and labor markets more generally that that program would end. If it looks like we’re not going to get that kind of progress now and going forward then we’d have to reconsider it, but I would be surprised if in the next two weeks we get enough data to make us change our mind on that,’ he told CNBC.

This post was published at GoldSeek on 22 October 2014.