quant easing

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There's More Than One Way for the Fed to End QE

By , Money Morning -

The market has been looking ahead to the inevitable end of the U.S. Federal Reserve's quantitative easing (QE) program with considerable apprehension.

Most market observers expect the end of the Fed's QE asset-purchasing program to immediately result in a sharp sell-off in bonds and higher interest rates.

This is expected to hit the mortgage-backed securities (MBS) market, where the Fed has been very active, quite hard.

As part of a policy to communicate more openly with the markets, Chairman Ben Bernanke and the Fed have been regularly launching QE exit strategy trial balloons into the market to see how quickly they get shot down.

The latest exit strategy that has been gaining traction is the idea of "tapering" QE asset purchases so that there isn't a sudden halt to supply of money flowing from the Fed into the Treasury and MBS markets. The markets seem to be pretty sanguine about the tapering idea, although there has been no specific suggestion on timing.

Instead, the markets have been concentrating on how the Fed will get rid of all of the assets it has accumulated on its balance sheet during the QE program.

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Prepare for Years of "QE Forever' with Ben Bernanke at the Helm

By , Contributing Writer, Money Morning -

When Ben Bernanke testified before Congress Tuesday and Wednesday, he staunchly defended his easy- money policies like quantitative easing, or "QE Forever."

"We do not see the potential costs of the increased risk-taking in some financial markets as outweighing the benefits of promoting a stronger economic recovery," the Federal Reserve chairman said.

Bernanke added the central bank takes "very seriously" the excessive risk-taking its dovish policies could provoke and is watching markets carefully.

He maintained that the bank's accommodative monetary policy has "supported real growth in employment and kept inflation close to our target [2%]."

But some Fed officials are growing concerned about quantitative easing - the Fed's purchases of $85 billion in securities a month - and believe it would be prudent to slow or stop the buying well before the end of 2013. Esther George, president of the Federal Reserve Bank of Kansas City, is one of the biggest hawks in the Federal Open Market Committee (FOMC) this year, citing unease about economic stability and inflation.

"While I share the objectives [of the FOMC]," George said in a Feb. 12 speech at the University of Nebraska Omaha, "I dissented because of possible risks and the possible costs of these policies exceeding their benefits...While I have agreed with keeping rates low to support this recovery, I know keeping interest rates near zero has its own consequences."

Despite the increasingly anxious sentiment, as long as Bernanke remains at the helm, QE Forever will be the policy. Here's why.

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Did the Fed Just Admit QE3 Has Been a Major Failure?

By , Associate Editor, Money Morning • @DavidGZeiler -

After four years of quantitative easing programs, including QE3 just last fall, U.S. Federal Reserve officials have started voicing doubts about its effectiveness and concerns that it is distorting the markets.

And it's not just the Fed's hawks, such as Dallas Fed President Richard Fisher and Philadelphia Fed President Charles Plosser, speaking out against the bond-buying extravaganza.

Doves like Atlanta's Dennis Lockhart and moderates like Kansas City's Esther George have expressed concerns about QE3 as well.

"I do think the growth of the Fed's balance sheet could have longer-term consequences that are worrisome. While I've supported these policy decisions to date, I acknowledge legitimate concerns," Lockhart said in a speech in Atlanta on Monday.

According to the minutes of the December Federal Open Market Committee (FOMC) meeting, several members "thought that it would probably be appropriate to slow or to stop purchases well before the end of 2013, citing concerns about financial stability or the size of the balance sheet."

If in fact sentiment within the FOMC is turning against QE3, then the easy money spigot that has helped fuel the stock market and other investments could be switched off sooner than most expected, which could have a sharp impact on the markets.

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QE Infinity Won't Work, But Here's What Will

By , Chief Investment Strategist, Money Map Report -

Dallas Federal Reserve President Richard Fisher recently offered a stunning assessment about our policymaking central bankers down in Washington.

They're winging it.

In a talk before a Harvard Club audience, Fisher presented a candid assessment about all the levers the Fed has been pulling in the aftermath of the 2008 financial crisis. And that includes the recently announced QE3.

"Nobody really knows what will work to get the economy back on course. And nobody-in fact, no central bank anywhere on the planet-has the experience of successfully navigating a return home from the place in which we now find ourselves. No central bank-not, at least, the Federal Reserve-has ever been on this cruise before."

I don't know about you, but the idea that four years and trillions of dollars into this quantitative easing voyage we're still sailing without a compass isn't just appalling.

It's terrifying.

Yet this ship of fools sails on.

The problem is, Fisher is right: QE3 won't work. QE1 and QE2 didn't fix this mess. Nor will QE4, QE5, onwards to infinity.

What's more, there's a cottage industry of pundits and consultants who'll agree.

Trouble is, just like Fisher and his colleagues at the Fed, none of them can tell you why it won't work.

That's what we're going to do here today.

We'll start by giving you the lowdown on how this nation's central bankers view "Quantitative Easing." Then we'll show you how the Fed thinks QE is supposed to work.

Finally, we'll punch some (actually, many) holes in in the Fed's hull by discussing why it's not working.

We'll even demonstrate what could still be done to fix this wretched mess.



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QE3 and Low Interest Rates Help Savers? Bernanke Thinks So

By , Associate Editor, Money Morning • @DavidGZeiler -

U.S. Federal Reserve Chairman Ben Bernanke wants you to believe his cheap money, low interest policies like QE3 actually have benefits for savers.

America's savers, many of whom are retired or nearing retirement, would beg to differ.

You see, low rates at the Fed - which has pledged to keep its interest rates near zero at least through 2015 - means low rates on conventional savings vehicles like bank accounts, certificates of deposit, and money market funds.

Those rates affect $10 trillion in savings-like products, costing savers billions of dollars.

For example, if a saver had $100 in a savings account in 2008 that paid 0.35% interest, she'd have just $102 today. But with inflation, $100 worth of goods in 2008 now costs $107.

That's a loss of 5% in four years, the sort of math that eats away at a retiree's standard of living.

And the rates of 2008 look fantastic compared to what's available now.

The Fed's actions have pushed down interest rates to microscopic levels. The average savings account interest rate has fallen one-third in the last year alone, to 0.08%.

The average yield on five-year CDs last month dropped below 1% for the first time ever. Back in 2007, five-year CDs provided a yield of 4%.

And yet in a speech he gave at the Economic Club of Indiana on Monday, Bernanke said his policies are helping savers.

Here's why.

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How QE3 and Higher Inflation Are Part of the Fed's Master Plan

By , Money Morning -

U.S. Federal Reserve Chairman Ben Bernanke might not admit it, but he just drastically increased the inflation risks for 2013 and beyond.

That's because Bernanke pledged on Sept. 13 that QE3 -unlike the stimulus programs before it - will continue for an unlimited timeframe.

QE3 has already led to a rally in commodity prices, like the previous Fed stimulus actions.

But this time the inflationary surge will get much, much worse.

"If the governments and central bankers continue to flood the world with cheap money, it has to translate into some kind of inflation," Money Morning Global Investing Strategist Martin Hutchinson recently explained. "We started with asset inflation. But my sense is that the transition from asset inflation to consumer inflation will happen very quickly."

With median income levels at averages not seen since the mid-90s, U.S. households need to prepare their savings to survive higher prices - especially while interest rates remain near zero.

Unfortunately, it appears this environment is exactly what Ben Bernanke has in mind.

"Not only will they tolerate higher inflation, not only will they wish for higher inflation, but they actually may target higher inflation," PIMCO CEO Mohamed El-Erian told CNBC ofthe Fed. "This is a historical bet that our kids will be reading about in history books."

Here's what Bernanke has planned.

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QE3 Not Required: Three Stocks Thriving Without the Fed

By , Contributing Writer, Money Morning -

When U.S. Federal Reserve Chairman Ben Bernanke opened the floodgates of easy money with quantitative easing (QE3), Wall Street staged a party.

But even though the market quickly jumped to five-year highs, stocks fizzled shortly thereafter.

And that leaves investors wondering whether this market has staying power.

"The question now is if investors feel brave enough to continue to buy stocks at such elevated levels," Fawad Razaqzada, market strategist at GFT Markets wrote in a note to investors. Investors looking for a safer route should focus on companies that can thrive on their own merits -- even without an intoxicating shot of QE3.

Companies that make products we have to have - the necessities of life, in other words -- tend to be more resistant to market ups and downs.

Let's take a look at three companies that have delivered steady, reliable returns for decades -- with or without QE1, QE2, QE3 or, someday, QE99.

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The QE3 Dangers Bernanke Isn’t Telling You About

By , Contributing Writer, Money Morning -

Hoping the third time is the charm, the U.S. Federal Reserve voted on Sept. 13 to launch another bond-buying program, QE3.

Equity and commodity markets cheered the Fed's move. Stocks rallied and analysts raised precious metals price forecasts.

QE3 differs from the first two rounds in that it is an aggressive open-ended purchase program of $40 billion per month of mortgage-backed securities. The buying is slated to continue until we reach substantial and sustained improvement in the U.S. economy, which won't be a short-term achievement.

The program aims to lower long-term interest rates, stoke consumer demand and bring down the elevated unemployment rate.

But some opponents think the latest stimulus measure from Fed Chairman Ben Bernanke will fail to achieve any of that.

In fact, the QE3 doubters have a lot to say - and anyone with money in the markets right now should pay attention to what could happen.

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Forget the Punch Bowl, With QE3 Ben's Party is Open Bar

By , Money Morning -

Everything changed on September 13. It's the day Ben Bernanke promised not to take away the punch bowl.

Last Thursday, Helicopter Ben announced that the Fed would start buying $40 billion in mortgage-backed securities -- for as long as it takes. He also announced the Fed will keep rates between 0-0.25%, until mid-2015.

The goal is to keep supporting the mortgage bond market until the employment level improves "sufficiently."

But given that the last several rounds of multi-hundred billion dollar stimulus didn't accomplish that goal, it's hard to see why they'd expect this time to be any different.

Maybe it's just because Paul Krugman was right: They didn't spend enough the first two times (sarcasm intended). Or then again, maybe that's not really their goal...

Consider this: At Jackson Hole just a few weeks ago Bernanke said that, historically, there has only been limited experience with quantitative easing. Therefore central banks, including the Fed, "have been in the process of learning by doing."

Excuse me, but are you freaking kidding me?...

Did Ben skip all his history classes? Has he ever heard of the demise of Rome or Weimar Germany?

More recently, even Argentina and Zimbabwe have had plenty of experience with quantitative easing. Their zealous over-printing led to major devaluation and/or outright currency collapse.

Couldn't Bernanke have checked in with Cristina Kirchner or Robert Mugabe?

The only real difference, and I'll admit it's a substantial one, is that the U.S. dollar is the reserve currency for the world's central banks. But that won't change the outcome.

Instead it may just delay the day of reckoning. In the meantime, it's very likely going to make the situation much, much worse.

So what's the Fed really up to?

Well, here's what I think...

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QE3 Delivers Fresh Ammo for Both Romney and Obama

By , Associate Editor, Money Morning • @DavidGZeiler -

U.S. Federal Reserve Chairman Ben Bernanke never intended his latest stimulus program, QE3, to become an issue in the 2012 presidential election, but he had to know what would happen.

"We have tried very, very hard, and I think we've been successful...to be nonpartisan and apolitical," Bernanke said at a news conference Thursday after the official Fed announcement of QE3. "We make our decisions based entirely on the state of the economy....So we just don't take those [political] factors into account. And we think that's the best way to maintain our independence and maintain the trust of the public."

In case you missed it, the Fed's third round of quantitative easing entails the purchase of $40 billion of mortgage-backed securities each month until unemployment shows a marked improvement.

In other words, for as long as it takes.

But with QE3 arriving less than 60 days before a bitterly contested presidential election, the Fed move was bound to get caught up in the campaign.

Both sides reacted immediately, with Republicans criticizing QE3 as unnecessary while Democrats applauded.

A few Republicans even accused Bernanke of timing QE3 intentionally to boost President Obama's re-election chances.

For the record, Bernanke is himself a Republican, appointed chairman of the Federal Reserve by President George W. Bush in 2006 and re-appointed by President Obama in 2010.

But with the Fed becoming a GOP bogeyman in recent years (thanks largely to the attacks from Rep. Ron Paul, R-TX), QE3 was bound to become weaponized in this year's increasingly acrimonious campaign.

Don't be fooled when each political party throws out the following QE3-fueled lines to get your vote.

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How QE3 – Like QE1 and QE2 – Will Trigger Inflation

By , Money Morning -

The traditional safe haven assets of gold (NYSE: GLD) and silver (NYSE: SLV) have surged in price due to the announcement of the latest round of quantitative easing, QE3 - but those aren't the only assets QE3 will push higher.

While QE3 might seem harmless to U.S. consumers, it is present every time they gas up their cars or buy food at the grocery store.

In fact, all three rounds of quantitative easing have led to higher priced commodities.

Whether you realize it or not, QE3 - same as the stimulus programs before it - is adding greatly to the costs of everyday life. QE3 is directly leading to higher prices for oil, food and the cost of imported goods.

Over time, that results in a tremendous consumer expense in all product and service categories.

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QE3 Becomes QE Forever

By , Contributing Writer, Money Morning -

Welcome to unlimited quantitative easing, or QE Forever.

The U.S. Federal Reserve goosed equities, Treasury yields, gold, silver, oil, platinum, palladium and investor sentiment on Thursday when it announced additional stimulus to spur economic growth.

The central bank said it will continue to buy mortgage-related debt and other securities until the job market shows significant signs of improvement so long as inflation remains tame.

"The market got what it wanted. Stocks immediately shot up," James Meyer, chief investment officer at Tower Bridge Advisers told Reuters.

In fact, the markets got more than expected.

As part of the Fed's new scheme, a marked difference from the first two rounds of QE, it will buy $40 billion of mortgage debt per month. Additionally, the Fed reiterated its stance of keeping interest rates at historic low levels, extending the time frame out until at least the middle of 2015.

"This is definitely a significant shift in FOMC policy," Julia Coronado, chief economist for North America at BNP Paribas in New York and a former Fed economist told Bloomberg News.

Plus, the Fed said it would continue Operation Twist, its action to bring down long-term interest rates.

Collectively, the Fed moves will flood some $85 billion a month into the struggling U.S. economy for the rest of 2012.

The Fed has always set a determined amount of Fed purchases. This time, however, it let America know that easing will endure and no tightening will occur until confidence recovers.

That's why QE3 is a game-changing move for the U.S. economy.

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