More on the Federal Reserve and Quantitative Easing

By Edward Harrison On Oct 5, 2010

Here is a good segment I did this past Friday on BNN founding anchor Howard Green’s "Headline" show. The other guest was Philip Coggan, capital markets editor at the Economist in London. Here’s what we had to say.

Record low two-year rates are telling us QE is coming, the Fed is worried about the economy and the Federal Reserve will be on hold for a very long time. Equities may benefit.
While it seems like equities are pointing to sunny days and bonds are pointing to lingering concerns, stocks have been range bound since this time last year after two scares and snapbacks.
Regarding quantitative easing, William Dudley of the NY Fed made some very dovish statements last week (see the end of this post). My read is that he is telegraphing what the Fed is likely to do. Market participants like David Tepper see this as a Bernanke put in action. If the Fed did not follow through, it would be negative for the market.
QE doesn’t work. Philip notes that US long-term rates were higher when they finished QE than when they began. Money supply (estimated M3) was lower afterwards than before. Rates only started dropping when QE stopped. QE is just an asset swap that drains income from the real economy.

(click on image for video)

Part 2 of that interview is here.

In this half, we covered some other ground as well including the currency wars that are an important topic of late. Here are the key takeaways:

Philip says the QE drug will be hard to withdraw because it means the Fed selling assets or not rolling over expired ones. That reduces the money supply at a time when deficit spending is still likely to be high. The Fed would be selling into a market already flush with bonds.
And remember, QE means a lower currency. It’s a way of trying to debase a currency to ‘steal’ competitiveness from others.
On Geithner and Trade Wars, Geithner is right to downplay a trade war. Ultimately, rhetoric does escalate into action.
On the economic reshuffle, Philip believes Geithner stepping down would be "a matter of concern".
My view is similar. It would be damaging politically to see Geithner go. Obama needs Tim Geithner regardless of Secretary Geithner’s effectiveness as an economic policy spokesman. He is the last man standing in the original senior team.
As for Summers’ replacement, we should expect a pro-business appointee, preferably a woman.

I have done a number of segments on BNN this summer. I apologize for not posting them. Here are two others from July that you may have missed: