In this post I will make a few (belated) comments regarding QE3, as announced by Ben Bernanke on Thursday. I highlighted notable aspects of that Press Conference, as well as provided links to the transcript, economic projections and FOMC Statement in the September 15 post (“Ben Bernanke’s September 13, 2012 Press Conference – Notable Aspects“)
While I could make many comments about Thursday’s announcement, I will at this point briefly comment on a few aspects. I have previously written extensively about the characteristics and risks of Quantitative Easing and Interventions as I believe many aspects of these practices lack recognition and understanding.
With regard to Thursday’s Press Conference, one aspect I found disconcerting was the discussion of QE3’s risks. First, I found it disconcerting that “risks” was not a term used, but rather “costs” (e.g. from the transcript “Of course, in determining the size, pace, and composition of any additional asset purchases, we will, as always, take appropriate account of the inflation outlook and of their efficacy and costs.”) While some may view this as semantics, I believe that the term “risks” is far more descriptive and appropriate.
Another notable aspect of the Press Conference was Ben Bernanke’s address of “three concerns” regarding additional quantitative easing. As seen on the transcript:
Before I take your questions, I’d like to briefly address three concerns that have been raised about the Federal Reserve’s accommodative monetary policy. The first is the notion that the Federal Reserve’s securities purchases are akin to fiscal spending. The second is that a policy of very low rates hurts savers. The third is that the Federal Reserve’s policies risk inflation down the road.
As I have written extensively, quantitative easing in general carries an array of risks, detrimental impacts, unintended consequences, and complex impacts on the economy and markets. The three “concerns” mentioned above, while significant, in my opinion are just a small fraction of areas of concern.
One area of tremendous concern is that of the (eventual) exit from the Quantitative Easing measures. One of my main concerns with regard to the exit is if it is done under “exigent circumstances” as opposed to under “normal” conditions. While an exit under normal conditions may – or may not be – orderly and nondisruptive to the economy and markets, an exit under “exigent circumstances” will likely be very traumatic. I first mentioned this “exigent circumstances” issue in the December 17, 2010 post (“Quantitative Easing Exit Issues“) and it remains a very significant concern.
Another aspect of concern is the impact QE3 will have. This issue is very complex. While I don’t necessarily agree with his view on the matter, I found Ben Bernanke’s comments – one seen below – to be very significant:
We do think that these policies can bring interest rates down. Not just treasury rates but a whole range of rates, including mortgage rates and rates for corporate bonds and other types of important interest rates. It also affects stock prices. It affects other asset prices, home prices for example. So looking at all the different channels of effect, we think it does have impact on the economy, it will have impact on the labor market but as again, the way I would describe it is a meaningful effect, a significant effect but not a panacea, not a solution for the whole issue. We’re just trying to get the economy to move in the right direction to make sure that we don’t stagnate at high levels of unemployment, that we’re making progress towards more acceptable levels of unemployment.
Quantitative Easing remains an important and contentious practice, and I intend to further comment on it as conditions warrant.
The Special Note summarizes my overall thoughts about our economic situation
SPX at 1458.59 as this post is written