US Not Cutting the Quantitative Easing Umbilical Cord in 2013
Published in JC Economic Foundation
(China) on 28 February 2013
by Chen Dong Hai (link to original)
(China) on 28 February 2013
by Chen Dong Hai (link to original)
Translated from
by Chase Coulson.
Edited by Lydia Dallett.
Feb. 20 and 21, there was a massive slide in the world stock index, subsequently reporting a substantial and continuous decline caused by the publication of the February 20 Federal Reserve meeting minutes. The report showed a major schism taking shape between the hawk and dove factions of the Federal Reserve, and it is due to quantitative easing (QE) policies.
Judging from shifts in the atmospheric makeup of recent Federal Reserve meetings, the subsequent market reaction does make some sense. The most recent minutes show that many members of the Federal Reserve board favor reducing the scope of QE before a full rebound in unemployment occurs. A particularly dovish member favored reducing the current unemployment threshold from the current rate of 6.5 percent, but the hawks believe that the massive scale of current balance sheets will increase the difficulty of later withdrawal measures, so it is felt that the scale of these asset purchases should be recalibrated in real time. On the other hand, the minutes from the December 2012 session, published in January 2013, show that several committee members believe that, somewhere near the end of 2013, appropriate actions will be taken to slow or suspend large-scale asset purchasing. Some of the committee members with voting privileges believe that the plan to purchase assets until sometime near the end of 2013 makes sense. Still others believe that there should be further steps taken toward launching large-scale stimulus efforts. In the October session that preceded these, the Federal Reserve officially approved round three of QE measures. In that session, many Federal Reserve officials called into question the validity of further rounds of QE, complaining that the policies could ultimately create more barriers for withdrawal. However, even more participants pointed out that after currently distorted policy measures expire at the end of 2013, additional asset purchasing the following year would be appropriate.
As a matter of fact, these three sessions prove that the split among factions within the Fed is becoming increasingly acute. On the hawks’ side of the equation, the majority has shifted from being skeptical of the proposal to slow or suspend QE by the end year, to embracing the idea that the unemployment situation should be allowed to improve first before aggressively reducing the scale of QE, as expressed in this last meeting. On the doves’ side of things, the focus has shifted from a push for third-round QE by those who believe that even more QE is appropriate in 2013, to the portion of members who believe strongly in the inevitable continuation of QE all the way to the end of 2013, to the number of members who believe in the large-scale expansion of QE, to the few who believe that rapidly reducing or ending QE policies would have a negative effect on the economy as a whole.
Obviously, the magnitude of power and the sheer volume of the hawks are increasing exponentially, while the trend is precisely the opposite for the doves. The overall results have been such that the Fed's attitude has gone from heartily recommending the third round of QE to deciding the next course of action only after policy talks in the next session and after keeping a close eye on the circumstances surrounding property acquisitions and related costs. Consequently, there's going to have to be specific criteria with which the Fed speculates on the timing of QE policy withdrawals.
But after carefully considering the situation as a whole, I believe that I'm not incorrect in surmising that, prior to the end of 2013, the Fed will not withdraw from further rounds of QE; at the very least, there will be no large-scale withdrawals or stoppages in QE policies.
First of all, pulling out of QE does not correspond with the Fed's own declaration. When launching the third round, the Fed promised that unless the national unemployment rate drops below 6.5 percent, and inflation levels rise beyond 2.0 percent — half a percent over their long-term regulatory goal — then it will keep the Federal interest rate within the ultra-low 0 to 0.25 percent window. In my own opinion, I believe that within the span of one year, the Federal Reserve will not be able to pass the two regulations simultaneously and, consequently, there will be no change in the interest rate. At such time as the Fed were to withdraw from QE, the effective interest rate would rise rapidly, which would be in conflict with its desire to keep the Prime Interest Rate between 0 to 0.25 percent. So, QE policies that were in place prior to 2013 will not change, or at least there will be no significant change.
Second, the situation in America, as it currently stands, really does not allow for a hasty retreat from QE. The soonest that America could enter into “voluntary spending cuts” procedures would be in March of this year, and then [it would need to] cut spending every year by $85 billion. Of course, the figures for just one year are not that extreme, but it does create quite a bit of uncertainty for the U.S. economy. Meanwhile, on May 19 of this year, the debt ceiling problem will once again rear its ugly head. And so, the fiscal cliff problem still exists in America, and before it's been solved, it will be very difficult to pull out of QE.
Third, the current international climate does not make it beneficial for the U.S. to withdraw from QE on its own. Europe has tightened its belt recently, government debt is in short supply, and the OMP debt purchasing plan [Outright Monetary Transactions plan] recommended by the European Central Bank will quite possibly be put into effect. With the recent Italian general election, the country will be hard pressed to produce a stable government, which creates a whole set of misgivings about the future of that country. So, Europe will have no wherewithal to reduce its QE plans for 2013. Meanwhile, in Japan, the new director of the central bank will be disclosed shortly, and Haruhiko Kuroda, the candidate who has thrown his support behind Abe's QE plan, is leading the pack. Monetary policies regarding major rising economies are extremely liberal, and America's marginal monetary policies are also extremely relaxed, so for the time being, it would be highly inadvisable for the U.S. to discontinue QE.
The preceding decisions are in keeping with Federal Reserve Chairman Ben Bernanke’s February 26 declarations published by the U.S. Senate Committee on Banking, and were verified during the Congressional midterms. Bernanke stated that the Federal Reserve will earnestly research these measures in order to react to the current underlying problems in policies that could overstimulate risk in the market. Presently, steps are being taken to further examine the market situation. Despite showing that some desire for financial market risk has increased, the Fed believes that the underlying costs associated with it do not outweigh the benefits in terms of economic stimulus and accelerated employment recovery.
Therefore, despite the Fed’s own internal power organ having increased support for the discontinuation of QE, with the fiscal cliff problem having not yet been resolved, and simultaneously the Federal Reserve’s own openly publicized criteria for QE withdrawals having been set up, and most especially the fact that the unemployment index still remains high, this leads me to the conclusion that the power and influence of the hawks within the Fed will by no means be decisive. They may be able to block the introduction of further steps toward even larger-scale QE, or at most they may be able to force the Fed to make token cutbacks to the scale of QE, but that would be the extent of it. Financial market sensationalism is anticipated, and it always happens far in advance. It’s only after finding that the essence itself has not changed that trends in sensationalism tend to reverse.
Judging from shifts in the atmospheric makeup of recent Federal Reserve meetings, the subsequent market reaction does make some sense. The most recent minutes show that many members of the Federal Reserve board favor reducing the scope of QE before a full rebound in unemployment occurs. A particularly dovish member favored reducing the current unemployment threshold from the current rate of 6.5 percent, but the hawks believe that the massive scale of current balance sheets will increase the difficulty of later withdrawal measures, so it is felt that the scale of these asset purchases should be recalibrated in real time. On the other hand, the minutes from the December 2012 session, published in January 2013, show that several committee members believe that, somewhere near the end of 2013, appropriate actions will be taken to slow or suspend large-scale asset purchasing. Some of the committee members with voting privileges believe that the plan to purchase assets until sometime near the end of 2013 makes sense. Still others believe that there should be further steps taken toward launching large-scale stimulus efforts. In the October session that preceded these, the Federal Reserve officially approved round three of QE measures. In that session, many Federal Reserve officials called into question the validity of further rounds of QE, complaining that the policies could ultimately create more barriers for withdrawal. However, even more participants pointed out that after currently distorted policy measures expire at the end of 2013, additional asset purchasing the following year would be appropriate.
As a matter of fact, these three sessions prove that the split among factions within the Fed is becoming increasingly acute. On the hawks’ side of the equation, the majority has shifted from being skeptical of the proposal to slow or suspend QE by the end year, to embracing the idea that the unemployment situation should be allowed to improve first before aggressively reducing the scale of QE, as expressed in this last meeting. On the doves’ side of things, the focus has shifted from a push for third-round QE by those who believe that even more QE is appropriate in 2013, to the portion of members who believe strongly in the inevitable continuation of QE all the way to the end of 2013, to the number of members who believe in the large-scale expansion of QE, to the few who believe that rapidly reducing or ending QE policies would have a negative effect on the economy as a whole.
Obviously, the magnitude of power and the sheer volume of the hawks are increasing exponentially, while the trend is precisely the opposite for the doves. The overall results have been such that the Fed's attitude has gone from heartily recommending the third round of QE to deciding the next course of action only after policy talks in the next session and after keeping a close eye on the circumstances surrounding property acquisitions and related costs. Consequently, there's going to have to be specific criteria with which the Fed speculates on the timing of QE policy withdrawals.
But after carefully considering the situation as a whole, I believe that I'm not incorrect in surmising that, prior to the end of 2013, the Fed will not withdraw from further rounds of QE; at the very least, there will be no large-scale withdrawals or stoppages in QE policies.
First of all, pulling out of QE does not correspond with the Fed's own declaration. When launching the third round, the Fed promised that unless the national unemployment rate drops below 6.5 percent, and inflation levels rise beyond 2.0 percent — half a percent over their long-term regulatory goal — then it will keep the Federal interest rate within the ultra-low 0 to 0.25 percent window. In my own opinion, I believe that within the span of one year, the Federal Reserve will not be able to pass the two regulations simultaneously and, consequently, there will be no change in the interest rate. At such time as the Fed were to withdraw from QE, the effective interest rate would rise rapidly, which would be in conflict with its desire to keep the Prime Interest Rate between 0 to 0.25 percent. So, QE policies that were in place prior to 2013 will not change, or at least there will be no significant change.
Second, the situation in America, as it currently stands, really does not allow for a hasty retreat from QE. The soonest that America could enter into “voluntary spending cuts” procedures would be in March of this year, and then [it would need to] cut spending every year by $85 billion. Of course, the figures for just one year are not that extreme, but it does create quite a bit of uncertainty for the U.S. economy. Meanwhile, on May 19 of this year, the debt ceiling problem will once again rear its ugly head. And so, the fiscal cliff problem still exists in America, and before it's been solved, it will be very difficult to pull out of QE.
Third, the current international climate does not make it beneficial for the U.S. to withdraw from QE on its own. Europe has tightened its belt recently, government debt is in short supply, and the OMP debt purchasing plan [Outright Monetary Transactions plan] recommended by the European Central Bank will quite possibly be put into effect. With the recent Italian general election, the country will be hard pressed to produce a stable government, which creates a whole set of misgivings about the future of that country. So, Europe will have no wherewithal to reduce its QE plans for 2013. Meanwhile, in Japan, the new director of the central bank will be disclosed shortly, and Haruhiko Kuroda, the candidate who has thrown his support behind Abe's QE plan, is leading the pack. Monetary policies regarding major rising economies are extremely liberal, and America's marginal monetary policies are also extremely relaxed, so for the time being, it would be highly inadvisable for the U.S. to discontinue QE.
The preceding decisions are in keeping with Federal Reserve Chairman Ben Bernanke’s February 26 declarations published by the U.S. Senate Committee on Banking, and were verified during the Congressional midterms. Bernanke stated that the Federal Reserve will earnestly research these measures in order to react to the current underlying problems in policies that could overstimulate risk in the market. Presently, steps are being taken to further examine the market situation. Despite showing that some desire for financial market risk has increased, the Fed believes that the underlying costs associated with it do not outweigh the benefits in terms of economic stimulus and accelerated employment recovery.
Therefore, despite the Fed’s own internal power organ having increased support for the discontinuation of QE, with the fiscal cliff problem having not yet been resolved, and simultaneously the Federal Reserve’s own openly publicized criteria for QE withdrawals having been set up, and most especially the fact that the unemployment index still remains high, this leads me to the conclusion that the power and influence of the hawks within the Fed will by no means be decisive. They may be able to block the introduction of further steps toward even larger-scale QE, or at most they may be able to force the Fed to make token cutbacks to the scale of QE, but that would be the extent of it. Financial market sensationalism is anticipated, and it always happens far in advance. It’s only after finding that the essence itself has not changed that trends in sensationalism tend to reverse.
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