Tags: david | frazier | Quantitative-Easing | fix | economy

Quantitative Easing Won't Fix the Economy

Tuesday, 28 Sep 2010 02:15 PM

There’s been a lot of discussion since the Federal Reserve released its latest monetary policy statement on Sept. 21 regarding the Fed’s purported plans to soon begin a new round of quantitative easing.

Yesterday, CNBC went so far as to conduct a poll asking economists, market strategists, and money managers to state the degree to which they expect the Fed to increase its purchases of government and government agency securities during the months ahead.

Persons who responded to that poll said, on average, that they expect the Fed to purchase approximately $500 billion of U.S. government and government agency securities during a six-month period beginning this November. Mark Zandi, of Moody’s Economy.Com, said that he thinks the Fed will purchase $1 trillion of government and government agency securities during the coming months.

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Although I expect the Fed to increase its purchases of mortgage-backed securities during the next few months in an effort to stimulate the housing market, my research suggests that any purchases of government and government agency securities will fail to stimulate the overall economy.

That’s because, primarily, U.S. employers have indicated that they plan to reduce the sizes of their workforces during at least the next few months, and because the U.S. banks already have more than $1 trillion in deposits to lend to their customers as a result of the massive amount of U.S. government securities that the Fed purchased during the past two years.

As an example of employers' plans to reduce the sizes of their workforces, global outplacement firm Challenger, Gray & Christmas announced on Sept. 1 that results of its latest monthly survey of U.S. employers showed that those employers plan to reduce their workforces by approximately 21,000 persons during the three months ending Nov. 30, 2010.

Separately, economic forecasting firm The Conference Board announced on the same day that U.S. employers posted 57,000 fewer job advertisements during August than they did during the prior month.

In light of the fact that both short-term and long-term borrowing rates, including mortgage rates, are currently near their lowest level on record, and that the confidence levels of Americans fell sharply during the past few months, I don’t expect the Fed to begin a new round of quantitative easing – of massive purchases of U.S. government and government agency securities. Quite the contrary, my research suggests that the Fed will limit its amount of government securities purchases during the months ahead.

If my forecast turns out to be correct, there’s a good chance that stock prices will soon pull back sharply. That’s because much of the recent run-up in stocks was due to investors’ assumption that the Fed will enter a new round of quantitative easing.

Note from Moneynews:

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About the Author: David Frazier
David Frazier is a member of the Moneynews Financial Brain Trust. Click Here to read more of his articles. He also writes two very successful investment newsletters. Discover more by Clicking Here Now.

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There s been a lot of discussion since the Federal Reserve released its latest monetary policy statement on Sept. 21 regarding the Fed s purported plans to soon begin a new round of quantitative easing. Yesterday, CNBC went so far as to conduct a poll asking economists,...
david,frazier,Quantitative-Easing,fix,economy
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2010-15-28
Tuesday, 28 Sep 2010 02:15 PM
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