‘Quantitative easing’ (central banks buying bonds) is all the rage. Every self-respecting central bank has a QE programme. The Bank of Japan’s is open-ended and has as its goal converting deflation to 2 per cent inflation in their economy.
Predictably, QE outrages many — those on the right of the ideological spectrum. They are the proverbial criers of the ‘wolf’ of inflation. But the wolf hasn’t appeared — not even after five years of printing trillions of dollars, which is what QE is in plain and simple English.
The tragedy of the opposite camp (‘Keynesians’) is that they are Cassandras — the mythological figure who was always right but never believed.
The QE debate is reaching high levels of excitement as the US interest rate-setting Committee, the FOMC, meets this week. Will it continue at $85 billion, or be cut back?
To answer this, we need to understand the economic and data setting.
Those are summed up in the Fed’s ‘Beige Book’, a periodic survey of the regional economies of the US by the 12 regional Federal Reserve Banks. For about a couple of years now, successive Beige Books have become tiresomely repetitive — growth and employment are in ‘moderate’ or ‘modest’ improvement.
That’s borne out in the GDP data (growth slightly over 2 per cent) and the widely-watched monthly jobs report, in which, on average, around 150,000 to 200,000 jobs are reported created every month for the past several months. The unemployment rate has dropped from 10 per cent to 7.5 per cent — a big fall but distorted by those pulling out of the employment market.
Serious implications
As of now, Fed Chairman Ben Bernanke is pretty candid that his strategy is to boost asset prices with zero interest rates supported by $85 billion of QE every month, hoping that they percolate to consumer spending and revive the economy and jobs.
Pathetic though the growth rate is, the market has suddenly taken fright that even in the ‘modest’ and ‘moderate’ growth and jobs environment, the Fed will start reversing QE. This led to a surge in 10-year Treasury yields from 1.6 per cent to 2.3 per cent in a couple of weeks and a significant stock market retreat the world over.
So few FOMC meetings in the recent past have been fraught with such serious implications for markets. There will, of course, be no rate change, but the post-meeting statement and Chairman Bernanke’s press conference will be key. What are the FOMC’s members going to say about QE and what’s on Bernanke’s mind?
The mood and vote swayers in the FOMC will be the (very much) sub-2 per cent core inflation and the still high unemployment and idle capacities in the economy. Falling commodity prices are a bonus, softening the price outlook. The commitment to holding zero rates is likely to be reaffirmed.
US economic prospects are distinctly better, but on tightening QE, ‘we ain’t there yet’, is likely to be the message.
(The author is a Chennai-based financial consultant.)