Quantitative easing

Wall Street is aware that the second round of Quantitative easing (QE2) is ending in June. This is despite the fact that both quantitative easing programmes have had little effect on unemployment in the United States. The real outcome was the effect on lowering bond yields (to the extent that we worry about another crash), driving down the US dollar and fuelling the rise in equity and commodity prices. As soon as it concludes, we will start to see sloppy data in manufacturing, unemployment and home prices. It is almost like a drug, where they continue to require an injection of “financial morphine” to the financial system. Once people are accustomed to it, they don’t know what to do without it.

At present, the markets may be holding the Federal Reserve to ransom. If there are continuing signs that the US economy remains sluggish and asset values continue to decline, could this be a trigger for the Federal Reserve to consider and implement a third round of quantitative easing?

Our view is that the Federal Reserve is just delaying the inevitable. It seems to continue to believe it can smooth out large falls and rises in markets only to see that what it has created will eventually lead to much larger swings. Did the Federal Reserve not learn from the Global Financial Crisis? Perhaps those currently in office do not want to look like the bad guys, however, if they take the pain now, they may become heroes in the future.