More QE is now lose-lose

Much was made of the July 31 FOMC meeting minutes yesterday noting that “many” of the members think more QE may be necessary if economic conditions do not improve. In fact however this wording is not a surprise in the sense that 8 of the 10 voting members on the FOMC are considered “doves” who have a constant bias toward more easing. So there is nothing new here, 80% of the committee are always in favor of more intervention.

More important I think, is that since the July 31 meeting traders have ramped up stocks and key commodity prices (ie food and energy) in anticipation of further monetary ease. This also caused a sell-off in treasuries and the commensurate spike in borrowing costs. These Pavlovian responses in market prices present the Fed with a problem now since $4 gas prices, $8 wheat and higher mortgage rates are serious blows to the spending ability of weak consumers. Spiking subsistence costs are an even greater wallop in developing countries.  Note: Chinese factory activity slumped to a nine-month low in August against expectations of a modest pickup. These are constraints on the global economy that were not as pronounced at lower prices 4 weeks ago.

In effect then, just considering more QE, the central bankers have further harmed the economy over the past month. If the Fed rolls out more in September this will only poison the patient further. As we have explained for some time now, more easing is now only lose-lose. Which means toppy stock prices have some ‘splainin’ to do in the weeks ahead.

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5 Responses to More QE is now lose-lose

  1. JW says:

    The Last Tango ? Not there yet. The participants love the dances. They have to keep the music playing until there is no one left. Thanks. JW, Langley BC

  2. John says:

    At the very least, one has to question the independence of the FOMC members. After all, the big money centre banks own the Fed reserve banks. I realize that the government likes to be involved, but since when does any organization NOT do what its owners want? Given the Fed’s impotence to stimulate growth so far, the FOMC has become more and more a PR arm than a policy-setting committee.

    Their greatest tool is talk. Aside from the need to keep using liquidity to pretend the banks are solvent, I think the Fed does not want to add more QE, but rather just make the public think they do. Managing expectations has always been as important as managing monetary policy. Look at our own Mark Carney. All he’s been doing for the past two years is talk, talk, talk. The greatest tool the BoC has has lately is Mr. Carney’s authoritative tone.

  3. Tony Hladun says:

    QE is taking future money from victims and giving that money to thieves and hoping that the victims feel better.

  4. aliencaffeine says:

    That gold dip around 1500 was sure a GREAT BUY. Comments from the mgt?

  5. Attila Balazs says:

    On Thursday, Republican Presidential candidate Romney announced that if elected he will not re-appoint Bernanke.
    The timing is interesting, after markets had become positive again since June on expectation that the Fed will be providing another round of stimulus to give the flagging economy a boost. The announcement puts Bernanke in an interesting situation.
    If the Fed does provide further stimulus in advance of the election, those of his critics who oppose further stimulus will claim he did so to give the economy an extra boost going into the election to protect his job, since if President Obama is re-elected he would be unlikely to switch horses in mid-stream.
    And if the Fed opts to stand aside, continuing to provide assurances of being ready to help if needed but doesn’t take action, critics who support more stimulus will claim he did not take action on concerns it would be seen as political, to affect the election and save his job.

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