The Need For QE3: How The Experts Line Up
Judging from the action in stock prices this week, investors are expecting another announcement of easy and huge monetary policy on Friday, when Fed chairman Ben Bernanke speaks to the bank's annual economic conclave at Jackson Hole, Wyoming. It was during the corresponding speech last year that he laid out plans for the second instance of quantitative easing. Will lightning strike twice?
Probably not, says Catherine Rampell of The New York Times. It's been just a couple of weeks since the Fed showed its hand and announced plans for low rates for two years:
It seems unlikely that the Fed would make major news so soon after that announcement, economists say.
"I don't think the picture has changed all that much from two weeks ago," said Paul Dales, senior United States economist at Capital Economics. "Suggesting more is in the pipeline already would smack of panic."Further to that point, she notes, while there was just one Federal Open Market Committee member who was vocal on inflation fears a year ago, today there are three (they all voted against the extended low rate plan). And they've got reason for concern -- the latest inflation report showed consumer prices rising at 3.6 percent year over year.
The conditions that existed before the two prior QE episodes were persistent economic weakness and the re-emergence of deflationary risk, notes Jim Reid, strategist at Deutsche Bank, in the Financial Times. (Sorry, I can't seem to find a link to it.)
"There is growing evidence to support the first condition, but the second condition is unlikely to find support as long as prices are rising and remain elevated...This may still have the potential to hold the Federal Reserve back from any significant pre-commitments and disappoint those who are hoping for more..."One group likely to endorse a QE3 is the professional investing crowd, because the first two doses have done a nice job of spurring the markets. The principle is that when the Fed buys bonds, the investors who owned them have to do something with the cash, and with rates so low, they put it into the risk markets, such as stocks and commodities. And that is just what has happened in the past.
Don Brownstein is a hedge fund manager, and not just any manager -- Bloomberg ranked him as the top performer in 2010. Business Insider quotes Bloomberg, quoting Mr. Brownstein on the merits of more massive monetary stimulus:
"My viewpoint is, [freaking out about inflation is] stupid: It has nothing to do with what we know from economic theory or economic fact."
"Right now, we really don't have any inflation. So worrying about it is like worrying about something like the bogeyman."Typically hedge fund managers don't talk to the press, for fear of tipping their hands to the competition. But it turns out Brownstein is looking to popularize an investment idea:
But there's another reason he wants QE3. He designed a new fund in March to profit off QE3, if there is one. It's called the SPM Macro: MVPQ fund (the name references a mathematical equation about the relationship between the supply of money and economic growth) and it's "designed to produce positive carry while waiting for the results of 'accommodative' monetary policy to take effect," according to his note to investors.