After last week’s slump, equity markets found their feet again early this week. They were buoyed by the hope that US Federal Reserve Chairman Ben Bernanke will signal a third round of quantitative easing (QE3), or money printing, in his speech today at the Fed’s annual symposium in Jackson Hole. Expectations of further QE to boost the US economy were “omnipresent” among investors this week, said Tom Porcelli of RBC Capital Markets. At last year’s Jackson Hole meeting, Bernanke signalled a second round of QE, fuelling optimism and triggering a rush into risky assets.
What the commentators said
There is a “high risk” that investors will be disappointed, said Bank of America Merrill Lynch. The Fed’s interest-rate-setting committee is divided on the issue, while QE has previously been justified as a means of preventing a slide into deflation. US core inflation was falling last year, but is rising now. Meanwhile, a nasty side effect of QE2 was a surge in commodity prices, said Larry Elliot in The Guardian: the printed money leaked into asset markets. “One of the few bright spots [of late] has been the drop in the price of oil.” This would be “put in jeopardy were QE3 to unleash a fresh wave of commodity speculation”.
But even if there is more QE, it’s hardly likely to work any better than the last dose. That failed “to promote a stronger pace of economic growth” as the Fed had promised – indeed, growth is fading fast. Monetary policy has reached “the limits of its usefulness”, said Stephen Foley in The Independent. With the economy working off debt, there is no appetite for borrowing or taking risks, regardless of how low rates or how much printed money is thrown at the system.
The fact that the economy didn’t recover with QE “should have undermined investors’ confidence” in its “medicinal properties”, said Capital Economics. Indeed it should, agreed The Economist. But markets have become “addicted” to being propped up by central banks. While the recent market slide shows that some investors are beginning to realise that central banks aren’t omnipotent, it seems most are still clinging to the ‘Bernanke put’. And that, said FXPro.com, means that anything less than another shot of QE today could trigger yet another downward lurch.