Market Values at the Time of Previous FOMC Announcements

November 3, 2010

Beginning with Chairman Bernanke’s address at the Jackson Hole annual symposium almost ten weeks ago, Fed officials have carefully prepared the public and financial markets for a second dose of quantitative easing.  A majority of policymakers, but not all, believe this controversial action is warranted because its two mandated target variables, employment and core inflation, are too low and likely to remain so without some intervention. 

The first round of quantitative easing, known as QE1, was introduced in the FOMC statement of December 2008 and quantifiably expanded in the statement of March 2009.  Officials took a shock and awe approach, announcing up front an enormous amount of assets to be bought by the central bank in 2009.  The intent was to depress long-term interest rates, and ten-year Treasury yields are presently very near to their 2.52% level in  mid-December 2008 despite an economic recovery that began in mid-2009 and a double-digit Federal deficit-to-GDP ratio.  The intent of QE2 will also be to keep long-term rates depressed, but officials recently have made remarks to quell expectations about how aggressively they will act.  In contrast to QE1, QE2 reportedly will follow an incremental tactical strategy.  The policy will commit to a shorter time horizon.  It will be open-ended in terms of ultimate size and reactive.  Fed officials intend to constantly assess how the policy is working and whether any more quantitative easing is needed.  The policy will continue so long as inflation and employment are too low and the benefits seem to be outweighing the costs of the program.

When officials met in September, the assessment of business investment was downgraded, and the pace of overall recovery was projected to “be modest in the near term.”  Fresh ground was broken, when the statement flatly asserted that core inflation was “at levels somewhat below those the Committee judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability.”  In short, the central bank served notice that inflation is too low and went a step further in promised action not to tolerate such indefinitely.  “The Committee… is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with it mandate.”

U.S. data have been less alarming lately.  Figures today were stronger than projected.  The service-sector purchasing managers index rose 1.1 points to 54.3, which follows Monday’s news of a 2.5-point increase in the manufacturing PMI to 56.9.  Likewise, the estimated 43K increase of private employment, according to ADP, was about twice as much as forecast.  Amid great uncertainty, taking an incremental approach to quantitative easing makes sense but still will not satisfy the central bank’s critics, who believe further growth in the balance sheet unduly magnifies the danger of a future inflation problem.  This view is of course not consistent with Japan’s experience.  In that country, debt has reached nearly 200% of GDP, yet deflation and sub-1% long-term interest rates persist over fifteen years after the last time short-term rates were above 0.5%.  Money and credit growth remain depressed in Japan and the United States.

The table below compares current vital market signs of the U.S. economy with levels at the time of prior FOMC announcements.

  EUR/$ $/JPY 10Y, % DJIA Oil, $
06/30/04 1.2173 109.44 4.63 10396 37.95
06/30/05 1.2090 110.89 3.96 10370 57.00
06/29/06 1.2527 116.07 5.20 11077 73.41
06/28/07 1.3452 123.17 5.10 13456 69.82
08/07/07 1.3749 118.55 4.73 13510 72.27
09/18/07 1.3888 115.75 4.51 13475 81.42
10/31/07 1.4458 115.28 4.42 13873 93.59
12/11/07 1.4682 111.49 4.11 13645 89.78
01/30/08 1.4792 107.31 3.70 12454 91.70
03/18/08 1.5786 98.73 3.41 12257 107.53
04/30/08 1.5562 104.58 3.83 12953 111.54
06/25/08 1.5568 108.37 4.18 11837 133.62
08/05/08 1.5445 108.42 3.97 11484 119.82
09/16/08 1.4144 105.16 3.36 10936 91.18
10/08/08 1.3625 99.87 3.50 9447 87.02
10/29/08 1.2933 97.15 3.81 9145 67.38
12/16/08 1.3790 90.14 2.52 8687 44.14
01/28/09 1.3253 90.01 2.61 8356 42.92
03/18/09 1.3115 98.13 2.94 7340 47.73
04/29/09 1.3331 97.06 3.02 8194 51.05
06/24/09 1.3984 95.43 3.59 8373 68.76
08/12/09 1.4221 96.17 3.71 9366 70.64
09/23/09 1.4779 91.50 3.50 9859 69.13
11/04/09 1.4884 90.75 3.51 9896 80.66
12/16/09 1.4542 89.78 3.56 10478 73.14
01/27/10 1.4045 89.49 3.61 10148 73.31
03/16/10 1.3756 90.64 3.67 10645 81.45
04/28/10 1.3157 94.10 3.75 11043 82.57
06/23/10 1.2284 90.12 3.13 10307 76.50
08/10/10 1.3107 85.85 2.81 10605 79.94
09/21/10 1.3132 85.21 2.66 10747 73.05
11/03/10 1.4026 81.38 2.54 11210 84.97

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.

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