Only last month Federal Reserve chairman Ben Bernanke said he wasn’t planning any new measures to bolster the US economy. But the increasingly discouraging data has fuelled fears of a double-dip recession and prompted the Fed to downgrade its growth outlook and launch ‘Quantitative Easing – lite’. Instead of allowing its balance sheet to shrink as the bonds it has bought up with printed money mature, the Fed will reinvest the proceeds from maturing mortgage bonds into government bonds. That, in short, puts money back into the economy.
What the commentators said
This is an absence of tightening rather than easing, said James Mackintosh in the FT. The overall balance sheet will stay steady. The important point is, the Fed is signalling that “deflation is indeed a worry” and if the economy keeps struggling, there could be more quantitative easing (QE). This week’s move was a “largely symbolic gesture” designed to reassure markets, agreed Capital Economics. It didn’t; stocks fell and bond yields rose following the announcement.
Perhaps it is dawning on markets that since “a mountain of stimulus has produced a molehill of a recovery”, yet more QE may not help, said Buttonwood on Economist.com. The Fed has pumped $1.3trn of printed money into the system by buying up government bonds and other securities. It hopes to boost bank lending and lower borrowing costs. But the money has piled up rather than move around the economy, stimulating activity. Jonathan R Laing in Barron’s noted that banks have deposited $1trn with the Fed rather than lend it out, even though they only earn 0.25% on it.
So banks are hoarding capital to help repair their balance sheets and guard against future losses. But lending has also fallen because “credit demand is collapsing” said Tyler Durden on zerohedge.com. Demand for consumer loans and mortgage debt is sliding, according to surveys of banks. Consumer debt has dropped for 20 successive months. Everyone is paying down debt now that the credit bubble has burst, and this trend is set to last: the US has “trillions more deleveraging to undergo”. In these circumstances more QE would just push on a string.
Not only will deleveraging take a long time, implying very soggy demand and growth, but there’s also “a ton of slack” in the economy, which will put downward pressure on prices, as Jan Hatzius of Goldman Sachs pointed out. He reckons inflation could be near zero by the end of next year. No use denying it, said David Rosenberg of Gluskin Sheff. This is starting to look like “Japan all over again”.