We certainly don’t envy Federal Reserve (Fed) Chairman, Ben Bernanke’s position. A student of the Great Depression and the Keynesian theory of growing out of trouble through loose monetary and fiscal policy, the Fed Chairman is now in a major dilemma. With Quantitative Easing Rounds 1 and 2 (QE1 and QE2) having not worked, Bernanke seems to be running out of options and time.
Recently, Bernanke announced that the Fed still had plenty of tools remaining if and when required. However, some economists are wondering whether it is nothing but a big bluff. Let's look at the facts. Since the recovery from the March 2009 lows, the Fed has implemented QE1 and QE2 by buying bonds and depositing much of the funds into banks to enable them to lend to corporations and boost confidence and lower unemployment. The results have been far from ideal.
Since QE2, unemployment has stayed stubbornly high, barely declining by less than half a percentage point. Meanwhile, the stock market took off after the announcement, but by the end of the easing timeline, stocks had again fallen to similar levels prior to the announcement. The only item that appears to have gained is asset prices such as commodities, bringing nothing more than asset price inflation as a consequence.
So why would investors believe a third round of quantitative easing will help? Unless the Fed changes its strategy from QE1 and QE2 and the stimulus is intended for more productive activities such as directly lending to industries in need of a confidence boost, the effects of more bond buying will do nothing more than push up precious metals to even higher levels.
No comments:
Post a Comment