The markets seem to be hoping that good ol’ helicopter Ben will come through with another round of quantitative easing (QE) tomorrow. Doing so would extend the legacy of the “Greespan Put” and probably ignite a speculative risk-on rally. Analysts like Dave Rosenberg and Bill McBride have pointed out how equity markets seem to be dancing around the Fed’s QE activities, shown for the S&P 500 below.
While the stock market has clearly had a run-up, QE’s impact on the economy has been less definitive. Assuming that QE’s immediate objectives were to lower interest rates and to stop deflation, then we could argue that QE has served its purpose. However, if the end goal for those objectives was to improve economic conditions, then QE has failed. Figure 2 shows the changes in interest rates, inflation, GDP growth, and unemployment since 2009.
Uncle Ben’s in a pickle. QE was like a second line of defense, a backup policy tool that was supposed to stimulate the economy after conventional rate easing had failed. But after two rounds of this “unchartered” policy territory, the economy still hasn’t gained much momentum.
Not only has QE been impotent in terms of improving the economy, but the policy may result in longer term detriments like inflationary pressures (not to mention the potential loss of Fed independence). When QE 1 & 2 were implemented the Fed had still some wiggle room, but now that interest rates are very low and inflation is on the rise, the Fed has little room for error.
Initiating QE 3 may secure the legacy of a Bernanke Put, but I doubt it will do much to significantly improve economic conditions in a sustainable way. The only policies that will accomplish that, in my opinion, are those that address the underlying fundamental issues impairing our economy (bad debt, inefficient resource allocation, dysfunctional legislature, etc.).
No, cash for clunkers did not help, and neither will print more money.
Victor K. Lai, CFA
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