While the Fed has pumped trillions into private banks via QE, banks have been loath to lend. While partly due to the rebuilding of bank capital and changing federal regulations, it’s also due to low rates. Making fixed rate loans makes no sense because as rates rise, loan values fall. Variable rate loans are also unappealing because when rates reset at a higher rate, borrowers have higher chances of defaulting.
Tag Archives: QE
Bonded Bernanke
By perfectly calibrating his message, this time, Bernanke was able to taper yet see equities climb by 1.75% and bond prices barely budge. Quite a difference from this past May. By combining tapering with a commitment to keep short-term rates low into 2015, Bernanke has reduced uncertainty and compensated markets for the knowledge that QE will shortly be history. He’s also emphatically saying that 2014 will be pretty good. Bravo!
Quantitative Easing
QE is not “printing money” as it does not increase the amount of money in circulation. Handing out $100 bills would be printing money. By purchasing Treasuries and MBS, the Fed raises the price of those securities and thus lowers interest rates. And lower rates can certainly result in an increased desire to borrow. But that increased demand will only lead to money supply growth if private banks make loans.
Quantitative Easing 3?
QE worked miracles by injecting massive liquidity into the economy in ’08 and ’09, and staved off a depression. While smaller, QE2 boosted equity prices and weakened the $US which boosted exports, raised commodity prices and headline inflation. If we get QE3, which is likely to be less successful than QE2, it’s because inflation’s receding, the stock market’s falling and Congress is MIA
Fiscal Year begins
Given signs of inflation QE ends in June taking wind out of the S&P. The fiscal year for S&L govts starts in July and big tax hikes and spending cuts are due. State restraint is already visible in reduced employment. In Oct federal spending cuts commence as fiscal ’12 begins. In Q1 ‘12, we will see headwind as the payroll tax cuts and bonus depreciation allowances that expire at the end of ‘11 won’t be extended.