Since the end of QE2 back on 30 June, Federal Reserve policy makers have tried two measures to try to boost the ailing US economy. They have however stopped short of a full-blown programme of asset purchases (QE3) and as a result global financial markets have failed to put in a meaning full rally.
QE2.1 came in the form of the Fed’s announcement on 8 August that it would keep interest rates (currently 0.25%) at “exceptionally” low levels until at least the middle of 2013.
Yesterday’s announcement by the Federal Reserve that it will sell $400 billion of its shorter-term securities to buy longer-term holdings can be thought of as QE2.2. The programme, called Operation Twist, is designed to lower bond yields and reduce interest rates on mortgages and other consumer and business loans. Unfortunately this new programme is unlikely to have a meaningful impact since bond yields are already very low – something that was immediately recognised by global financial markets.
Since the end of QE2 the S&P 500 index has fallen over 10%, the FTSE 100 has fallen 12% and commodities such as copper and crude oil have tumbled 13% and 11% respectively.
There are many that say that the Fed is out of bullets but this is not a view I share. I remain confident that QE3 (by a different name) is on its way, after all the US presidential election is less than 14 months away and Obama surely wants a second term. Here too the Bank of England have signalled that it is on the verge of more money printing to support growth.
In the meantime, the lack of large scale central bank intervention means that it’s ok to remain short.