For well over a year now, I’ve been stating that the Fed will not be able to engage in Quantitative Easing (QE) unless systemic risk hits (think another 2008). My reasons for this are as follows.
First off, the political consequences of hitting “print” (inflation) have made themselves evident to everyone. Indeed, Bernanke was talking about this point as far back as May 2011. The below quote is from a Q&A session with Bernanke during that month.
Q. Since both housing and unemployment have not recovered sufficiently, why are you not instantly embarking on QE3? — Michael A. Kamperman, Waco, Tex.
Mr. Bernanke: “Going forward, we’ll have to continue to make judgments about whether additional steps are warranted, but as we do so, we have to keep in mind that we do have a dual mandate, that we do have to worry about both the rate of growth but also the inflation rate…
“The trade-offs are getting — are getting less attractive at this point. Inflation has gotten higher. Inflation expectations are a bit higher. It’s not clear that we can get substantial improvements in payrolls without some additional inflation risk. And in my view, if we’re going to have success in creating a long-run, sustainable recovery with lots of job growth, we’ve got to keep inflation under control. So we’ve got to look at both of those — both parts of the mandate as we — as we choose policy”
The significance of Bernanke’s admission went largely unnoticed by the financial media. How many times has CNBC and Bloomberg and the like put on various “gurus” who guarantee that QE 3 is just around the corner?
Yet, here we are one year and over 10 Fed FOMC meetings later and the Fed hasn’t launched any new QE programs. Think about that. For over a year now the financial media has been awash with “experts” saying “QE is just around the corner, the Fed will launch QE any minute now, etc” Every time stocks rally. But. No. QE.
Instead the Fed has largely resorted to simply shuffling its portfolio around (Operation Twist 2) or issuing verbal/symbolic interventions e.g. promising to maintain ZIRP for a prolonged period.
Heck, the Fed has even admitted it doesn’t want to engage in more QE. Just this morning the NY Fed released a study revealing that the Fed has managed to double the value of the S&P 500 just by holding regular FOMC meetings.
As the above chart shows, when you remove for the market moves that took place around Fed FOMC meetings, the S&P 500 would be around 600 today.
Thus, I ask… why bother implementing QE when you can get the same effect (higher stock prices) simply by issuing verbal interventions?
We get more evidence that the Fed doesn’t want to engage in more QE from the fact that the Fed has clearly gone into damage control mode. Bernanke has staged townhall meetings, opened the Fed to Q&A sessions, and even had his favorite Wall Street Journal reporter (Jun Hilsenrath) pen articles depicting him (Bernanke) as an average guy who drives a Sebring and reads a Kindle.
Remember, we’re talking about a man who openly lied to Congress (Bernanke’s famous “I won’t monetize the debt” statement) … a man who basically told reporters to get stuffed regarding the Fed’s secret loans during the 2008 Crisis… now staging townhall meetings with the public. If that doesn’t tell you that the Fed is feeling some major political heat, nothing will.
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