Tags: Kaufman | economy | quantitative | easing

Henry Kaufman: QE Tapering Has Had 'No Visible Effect on Markets'

By    |   Tuesday, 04 March 2014 11:48 AM

Economist Henry Kaufman, nicknamed Dr. Doom for his bearish pronouncements about the economy in the 1980s, sounds much more optimistic these days.

He says the economy can easily handle the phase-out of the Federal Reserve's quantitative easing.

"Thus far the reduced pace of Treasury and mortgage-backed securities [purchases] have had, on balance, no visible effect on markets," Kaufman, president of Henry Kaufman & Co. consulting firm, writes in The Wall Street Journal.

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"More important, improvements in key sectors of the economy suggest that the market will be able to withstand quite a bit of monetary tightening before there is any negative affect on growth."

Corporations won't get hurt by a finish to quantitative easing, he explains. Companies have built up heavy cash reserves, though that fortification is concentrated in a few industries, such as high technology, oil and pharmaceuticals.

Meanwhile, "households, the other key demanders of credit, are also in reasonable shape to withstand the end of quantitative easing," Kaufman writes. "Many have already refinanced their existing mortgages at historically low interest rates."

Bank balance sheets also are on the mend, he notes, adding that there is "a new willingness to make loans and investments."

"The end of quantitative easing does not necessarily mean that the Fed will return to its more traditional tactics, that is, confining its activities to open market operations — buying and selling Treasury bills, infrequent purchases of longer-dated obligations and engaging in repurchase agreements. This is because the structure of the financial markets has changed dramatically in recent decades," Kaufman argues.

"Policy will continue to be more hands on than hands off."

To be sure, a recent paper from economists Michael Feroli of JPMorgan Chase, Anil Kashyap of the University of Chicago, Kermit Schoenholtz of New York University and Hyun Song Shin of Princeton University argues that the economy may not handle a Fed exit from easing so well.

"Stimulus is not a free lunch, and it comes with a potential for macroeconomic disruptions when the policy is lifted," they write.

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Economy
Economist Henry Kaufman, nicknamed Dr. Doom for his bearish pronouncements about the economy in the 1980s, sounds much more optimistic these days.
Kaufman,economy,quantitative,easing
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2014-48-04
Tuesday, 04 March 2014 11:48 AM
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