Doubts cast over QE at Jackson Hole

30th August 2012

In a paper by William R. White, the chairman of the economic development and review committee at the Organisation for Economic Co-operation and Development (OECD), issued by the Dallas Fed the author expresses growing doubts over the effectiveness of extraordinary monetary policy.

The problem, White argues, is that quantitative easing (QE) has become a proxy for a boost in government spending.  Unfortunately, as they are an imperfect substitute, the measures run the risk of unintended long run consequences.

Of these the most serious is that "over time, easy monetary policies threaten the health of financial institutions and the functioning of financial markets".

These warnings will be far from good news to those who expected the Federal Reserve to announce another large scale asset purchase programme. Rumours of further monetary easing had already pushed US government bond yields down to three-week lows on Tuesday.

Indeed Reuters reported Hans Mikkelsen, a credit strategist at Bank of America Merrill Lynch in New York, as saying:

"It appears likely that the market will be spending the fall with a significant probability of QE3 priced in."

Yet doubt had already been cast over the case for easing on news that US house prices had rebounded in June, growing 1.2% over the second quarter. Equity markets have also remained buoyant with the S&P 500 up around 10% from its June lows.

Furthermore with election season getting underway there is also the risk of any decision Bernanke makes being given a political spin. If he chooses to go for another round of QE there will be a number of Republican pundits ready to (mis-)interpret this as a political decision to boost markets ahead of the November vote. After all Mitt Romney has repeatedly stated his intention of replacing the Fed chairman if he is elected.

Conversely Democrat campaigners may equally spuriously view a lack of stimulus as a means to starve the economy of necessary support in an effort to harm the chances of President Obama's re-election.

If the case for QE truly is weak, then the central banker may be tempted to borrow a few lines from Robert Bolt's play "A Man for All Seasons" about the life of Thomas More. When More is accused of treasonous inaction he answers:

"The maxim is "Qui tacet consentire": the maxim of the law is "Silence gives consent". If therefore you wish to construe what my silence betokened, you must construe that I consented, not that I denied."

That is, in not committing to a policy move both sides would have to assume that Bernanke acted in their favour, while neither could claim that it was done out of malice.

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