QE 3 isn’t coming folks. The Hilsenrath article a few days ago was just a leak to prop the market higher. And it falls well within the Fed’s latest scheme: to prop the market up verbally rather than actually engaging in monetary policy.
Going back to July 2011, the Fed has largely resorted to verbal or symbolic intervention rather actual monetary action. In terms of actual actions, since that time the Fed has:
- Promised to extend its Zero Interest Rate Policy (ZIRP) through late 2014.
- Had various Fed officials promise that the Fed was ready to “act” anytime the market took a dive.
#1 is completely and totally meaningless. ZIRP is a trap and it’s a trap that the Fed cannot escape for three reasons:
- US commercial banks are sitting on over $200 TRILLION in interest rate based derivatives.
- In 2011, the US made $454 BILLION in interest payments. And that’s with interest rates at or near 0%. According to the Congressional Budget Office, the estimated interest that will be due on the US’s debt load by 2015 will be $533 billion: an amount equal to 1/3 of all federal income taxes collected that year (assuming the economy grows). Imagine what happens if rates rise.
- US Corporations currently owe $7.3 trillion in debt (an amount equal to roughly half of the US’s GDP). Any rise in interest rates means corporate payouts increasing dramatically and corporate profits shrinking.
So promising to extend ZIRP is ultimately pointless. It’s the same thing as saying “I promise to keep breathing until I die.” The Fed has to and will maintain ZIRP until the financial system implodes and interest rates soar as investors demand reasonable rates of return in exchange for the risk they take for investing in various bonds.
As for the Fed’s secondary policy (verbal intervention whenever the markets roll over) it is Chicago Fed President Charles Evans who clamors most for more easing.
Is QE3 Right Around The Corner?
(August 30 2011)
So much for no QE3, at least if Charles Evans gets his way.
Chicago Federal Reserve President Charles Evans was on CNBC just a few minutes ago, and comments from Evans made it sure seem like an additional round of quantitative easing is on its way.
http://www.benzinga.com/media/cnbc/11/08/1890663/is-qe3-right-around-the-corner#ixzz1oHCdaaE2 [16]
Bernanke Managed Expectations Like A Champ: QE3 Is Around The Corner
(November 2 2011)
Dissent, though, jumped from hawks to doves as Chicago Fed President Charles Evans wanted more accommodation; along with a reference to lower inflation, these two suggest Bernanke has managed to save his last bullet, and will probably bring out the quantitative easing in coming months.
Federal Reserve Could be Laying the Groundwork for QE3
(December 6 2011)
Chicago Fed President Charles Evans gave a speech at Ball State on December 5, and within it he detailed some of the actions that the Fed could take to support its dual mandate of promoting maximum employment and fostering price stability. Although Evans did not specifically mention asset purchases, he said that without action the Fed could fail both parts of its dual mandate.
Evans is the President for the Chicago Fed. Chicago is the second largest financial center in the US (after NY). So this guy is simply pushing for his “constituents” in calling for more monetary accommodations from the Fed. He is, in a sense, playing “good cop” for his cronies in the financial industry while other more rural based Fed Presidents (Kansas, Dallas) play “bad cop” saying there should be no more easing and that the Fed might even need to raise rates.
Indeed, compare Evans’ statements with those of Dallas Fed President Ken Fisher from a recent speech in Texas.
I am personally perplexed by the continued preoccupation, bordering upon fetish, that Wall Street exhibits regarding the potential for further monetary accommodation—the so-called QE3, or third round of quantitative easing. The Federal Reserve has over $1.6 trillion of U.S. Treasury securities and almost $848 billion in mortgage-backed securities on its balance sheet. When we purchased those securities, we injected money into the system. Most of that money and more has accumulated on the sidelines: More than $1.5 trillion in excess reserves sit on deposit at the 12 Federal Reserve banks, including the Dallas Fed, for which we pay private banks a measly 25 basis points in interest. A copious amount is being harbored by nondepository financial institutions, and another $2 trillion is sitting in the cash coffers of nonfinancial businesses.
Trillions of dollars are lying fallow, not being employed in the real economy. Yet financial market operators keep looking and hoping for more. Why? I think it may be because they have become hooked on the monetary morphine we provided when we performed massive reconstructive surgery, rescuing the economy from the Financial Panic of 2008–09, and then kept the medication in the financial bloodstream to ensure recovery. I personally see no need to administer additional doses unless the patient goes into postoperative decline. I would suggest to you that, if the data continue to improve, however gradually, the markets should begin preparing themselves for the good Dr. Fed to wean them from their dependency rather than administer further dosage.
http://www.dallasfed.org/news/speeches/fisher/2012/fs120305.cfm [19]
It’s clear here that Evans, a financial center Fed President is the Wall Street “good cop” while Fisher, a Dallas based Fed President is the “bad cop.” One pushes for the market to rally, the other tries to cool inflationary expectations.
And yet, for all this talk and hype, QE 3 is nowhere to be found. And it won’t be showing up anytime soon unless a full-scale Crisis hits. The reason for this is that the political landscape in the US has changed dramatically with the Fed becoming more and more politically toxic: GOP Presidential candidates began taking swipes at the Fed early on in the candidacy race and it became increasingly clear that the Fed would be one of the primary political issues for the 2012 Presidential election.
As a result of this, the Fed (with the exception of those Presidents who represent financial centers, namely Evans for Chicago and Dudley for New York) began to shift into damage control mode.
This included:
- Suing Goldman Sachs (the firm considered to have the closest ties to the Fed) so as to distance itself from its Wall Street darlings
- Shifting the blame for the Financial Crisis as well as the terrible state of the US’s finances onto Congress’s shoulders
- Launching a PR campaign to portray Ben Bernanke as an all around good guy (opening the Fed to Q&A sessions with the press, staging town hall meetings with the public, and getting editorials written in the Wall Street Journal on how Bernanke is just an ordinary guy like the rest of us).
In light of this, it is clear that that the bar for QE 3 had been raised dramatically. As a result, since early autumn 2011, I’ve been writing that the Fed would NOT unleash QE 3 without a Crisis hitting first.
So don’t bank on QE hitting next week. Which means… the Fed will disappoint, and we will get a market correction. All the macro and technical signs point towards something bad coming this way. The red flags are literally everywhere. And judging by the significance of them, we could very well be heading into a full-scale Crisis.
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