How’s Quantitative Monetary Easing Working Out?

November 15, 2010

The initiation of a second round of quantitative easing by the Fed at the start of this month sought to boost employment growth and inflation.  Officials hope to promote these goals through a variety of channels:

  • By depressing long-term interest rates and thereby stimulating investment and housing.
  • By lifting share prices and creating a wealth effect to encourage household spending.
  • By depreciating the dollar and thereby raising export competitiveness.
  • A weaker dollar and faster growth in central bank money also are meant to halt the downtrend in expected inflation that might be encouraging consumers to postpone purchases of goods and homes in hopes of securing lower prices and financing costs.

These are early times in this experiment, but the uneasy rustling in the market that things may not work out as hoped is already audible.  Even where considerable progress seemed to be occurring, for instance in the dollar’s decline, the trend has partly reversed this month.

The Fed’s plans were revealed — preannounced if you will — in Chairman Bernanke’s speech at the Jackson Hole Symposium on August 27 and implemented for real at the FOMC’s last policy meeting on November 3, some 9-1/2 weeks later.  The table below gives the level of key market indicators on August 27, November 3, and today.  Rates at the close of December 30, 2008 are also given for further comparative purposes, that being when the full brunt of the recession was being felt and when 10-year Treasury yields came within ten basis points of a mere 2.0%.

  12/30/08 08/27/10 11/03/10 11/15/10
10Yr, U.S. 2.09% 2.64% 2.58% 2.95%
30Yr, U.S. 2.63% 3.69% 4.05% 4.28%
10Yr, Germany 2.95% 2.20% 2.42% 2.56%
10Yr, U.K. 3.09% 2.90% 3.00% 3.27%
10Yr, Japan 1.17% 1.01% 0.95% 1.06%
DJIA 8668 10151 11215 11202
DAX 4810 5951 6618 6790
EUR/USD 1.4068 1.2734 1.4133 1.3585
USD/JPY 90.32 85.26 81.17 83.15
USD/CNY 6.8320 6.7992 6.6778 6.6457
Gold $873.70 $1238.10 $1348.55 $1359.60
Oil $39.03 $75.17 $83.90 $84.62


Long-term interest rates are higher than in late August not only in the United States but across other advanced economies as well.  The uptrend in U.S. stock prices was reinvigorated by Bernanke’s clue that QE2 was likely but appears to have stalled recently.  The fear of a possible yearend sell-off  in stocks and possibility of more slippage in property values should neutralize any chance of a positive wealth effect in the very near term.  Dollar gains between August 27 and November 3rd have been trimmed.  Net changes since late August are not great enough to impact export demand in a meaningful way.  The one consistent trend since ground zero of the recession is the rise of commodity prices.  By August 27 of this year, gold and oil had advanced 41.7% and 92.6%, and since that day, they have advanced by a further 9.8% and 12.6%.  These sharp advances more likely will retard economic growth than lift such.

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



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