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Monday, September 24, 2012

QE 3 Critiqued

For John, BLUF:  We don't know where the Federal Reserve is taking us.  It is a crap shoot.  Nothing to see; just move along.

Earlier this month the Federal Reserve Bank's Federal Open Market Committee (FOMC) voted to give us QE3, or the third round of Economic stimulus.  From Wikipedia:

QE3 was announced on September 13, 2012. In an 11-to-1 vote, the Federal Reserve decided to launch a new $40 billion a month, open-ended, bond purchasing program of agency mortgage-backed securities; to continue until at least mid-2015.[62] According to, this is effectively a stimulus program which allows the Federal Reserve to print $40 billion dollars a month for an unlimited amount of time.[63] Ratings firm Egan-Jones said it believes the Fed’s decision “will hurt the U.S. economy and, by extension, credit quality.” As a result the firm once again slashed the U.S. bond rating bringing it down to AA-. Federal Reserve chairman Ben Bernanke aknowledged concerns about inflation.
In remarks before the Harvard Club of New York City, September 19, 2012, President and CEO of the Federal Reserve Bank of Dallas Richard W. Fisher, said "We Are Sailing Deeper Into Uncharted Waters", economics wise.
It will come as no surprise to those who know me that I did not argue in favor of additional monetary accommodation during our meetings last week.  I have repeatedly made it clear, in internal FOMC deliberations and in public speeches, that I believe that with each program we undertake to venture further in that direction, we are sailing deeper into uncharted waters.  We are blessed at the Fed with sophisticated econometric models and superb analysts.  We can easily conjure up plausible theories as to what we will do when it comes to our next tack or eventually reversing course.  The truth, however, is that nobody on the committee, nor on our staffs at the Board of Governors and the 12 Banks, really knows what is holding back the economy.  Nobody really knows what will work to get the economy back on course. And nobody—in fact, no central bank anywhere on the planet—has the experience of successfully navigating a return home from the place in which we now find ourselves.  No central bank—not, at least, the Federal Reserve—has ever been on this cruise before.
"…allows the Federal Reserve to print $40 billion dollars a month for an unlimited amount of time."  I make that to be near half a trillion dollars a year.

This doesn't inspire confidence.

Regards  —  Cliff

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