Where’s the QE?

2012-NOV-12

James Turk asked this question last week in his interview with Lauren Lyster, and Trader Dan made the same query at his blog over the weekend.

The Federal Reserve's balance sheet has essentially flat lined since the summer of 2011 – despite the fact that they committed to buying $40 billion of mortgage backed securities (MBS) a month as of September 13, in an effort to juice the economy. Comments at the bottom of Dan’s piece say that this is to do with settlement dates for MBS: according to some, these will begin to occur in the coming weeks, which should show up on the Fed’s balance sheet.

Alternatively, perhaps the Fed’s relative inaction is an experiment in seeing how far it can talk up markets without having to act. Bernanke and the rest of the FOMC are all intelligent individuals who must be aware of the potential pitfall of QE – namely, the potential for a dramatic and sudden loss of confidence in the dollar if they push too hard in the direction of easing. So, in the spirit of Churchill, “jaw-jaw is better than war-war”: better for the Fed where possible to talk its way towards its market objectives rather than actually walking the walk. Lest we think this is too cynical a take, consider the words of former Fed Reserve Board Vice Chairman Alan Blinder: “the last duty of a central banker is to tell the public the truth.”

Looking at the bigger picture though, there can’t be much doubt that the Fed’s balance sheet will start growing again soon, given the increasingly sluggish stock market, and the “threat” facing the US economy in the form of the fiscal cliff. Whether or not the Fed’s buying can counteract the uncertainty and bearish vibes emanating from the fiscal cliff discussions remains to be seen.