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!
Tag Archives: QE2
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.
Winners and Losers
Because Quantitative Easing Two (QE2), which is soon ending, forced interest rates down to record lows, stocks and commodities soared as investors’ searched for better returns than those available on Treasuries. US exporters also enjoyed the lift they received from the weak dollar. But, seniors were pounded as their savings have been earning virtually nothing. Granny can’t wait for QE2 to end.
Good Vs. Bad Inflation
The Fed via QE2 tried to generate inflation but got the wrong kind. Instead of wage inflation or real estate inflation (including house price increases) which causes people to ratchet up their spending because they feel richer, what we have are soaring prices for items that are hard to substitute away from such as energy and food. And this results in lower real incomes.
Fed unleashes…
The Fed sees the economy through the lens of a wealth effect stimulating consumer spending. And gains in the stock market have helped achieve that but only 20% of Americans own equity directly. But we all eat and most of us drive and what the Fed has also unleashed via QE2 is a weak dollar and substantial speculation in commodity markets when global supplies for raw materials are generally tight.