Levenson: Fed's QE2 'slightly light' of expectation
Here's is T. Rowe Price Chief Economist Alan Levenson's take on the Fed announcement:
Bottom line: No change in assessment of current environment, dimensions of QE2 slightly light of expectations; with additional easing course in place, policy bias returns to balance. Economic assessment remains that "the pace of recovery in output an employment continues to be slow." Inflation assessment remains that underlying inflation is "somewhat low" relative to levels judged to be consistent, over the longer run, with the Fed's price stability objective. QE2 a bit light of consensus expectations. Today's action calls for purchases of $600 billion of Treasury securities by the end of 2011 Q2 -- roughly $75 billion/month. Including reinvestment of principal from mortgage-related securities, the Fed is likely to buy $850b-$950b through 2011 Q2. Outlook for further action now balanced. The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to support the economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate. [In the September 21 statement, the italicized portion read, "is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate." -- underlining added for emphasis]
UPDATE. And more from Swiss Re:
Fed rate action commentary from Swiss Re chief US economistNew York, 3 November 2010 – After today’s decision by the Federal Reserve to maintain the target fed funds rate at zero to 25 basis points, Swiss Re’s chief US Economist, Kurt Karl, commented, “Growth is moderate and inflation is very low, so the Fed is now expected to be on hold through all of next year. The quantitative easing program signals a strong commitment to the Fed’s
mandate of low unemployment.” “Though economic indicators remain mixed, there is only a small risk of another recession – still estimated to be about 10% for both the US and Europe. Nevertheless, the Fed has now begun a new program of quantitative easing to keep long-term interest rates low. So far, low interest rates have not been able to revive the housing sector, but companies are borrowing and bank profits are up. Real GDP growth is expected to be 2.7% this year, and only a bit stronger, 2.8%, next year as employment increases and housing starts finally begin to increase. All-items inflation is expected to be close to 1.5% this year and next, while core inflation will be closer to 1%. The yield on the 10-year Treasury note will be mostly rising in 2011, reaching about 3.8% by year-end. With low inflation and modest growth, the Fed is expected to keep the fed funds rate at 0.0% to 0.25% until the first quarter of 2012,” Karl said.“Both the Euro area and the UK are expected to grow by 1.5% to 2.0% this year and next. China's outlook remains robust, but growth is expected to slow from about 10% this year to 9% and 8% over the next two years. Japan's growth will slow to about 1.5% next year from 2.5% this year. Inflation is only an issue in the UK currently, but it is expected to decline to close to 2% by 2012 as special factors, such as VAT increases, disappear. The European central banks are expected to move earlier than the Fed, raising rates slowly and cautiously beginning in the third quarter of next year. This will hold down yields on 10-year government bonds as well. The low interest rates in developed economies will continue to aggravate exchange
Comments
Under what school of economic theory are they operating? It sure isn't the Keynesian school. To think this can have any impact on aggregate demand and national income is to conflate a change in the real money supply with a change in the nominal money supply, and ignore the fact that all Treasury yields on terms shorter than 10 years are already under 1%.
This is about saving the banking system under the pretext of saving the economy. Every talking head who buys into this somehow pushing AD and lowering unemployment is either incompetent, corrupt, or some combination of both.
Posted by: Josh Dowlut | November 4, 2010 12:20 AM
They are calling this QE2... I think TITANIC would be a more appropriate name.
Posted by: dave | November 4, 2010 4:04 AM