I continue to read more and more about the potential impact of the Federal Reserve easing back on Quantitative Easing (QEI, II and III). Print and Broadcast Media have been haranguing about this for some time. And, unfortunately, no one has been focused on: What if they don’t?
Now, keep in mind that FED Chairman Ben Bernanke, along with his staff, has probably been most responsible for keeping the U.S. Economy from falling into that (Financial) Abyss, which we were told about some five years ago, and starting to grow back from it–albeit more slowly than most people would like. If we had had more Federal Stimulus, on the Fiscal (spending) side, the total effect would have been a much stronger recovery. And, when you consider the disruptive impact of Lehman Bros. filing for bankruptcy, just think of what the true devastation would have been Worldwide if the United States had followed?
The FED has several basic tools in which it manages Monetary Policy; however, when the FED Funds Rate (the rate at which banks lend short-term cash to each other) was virtually reduced to ZERO, the FED was considered to be “out of bullets”. What more could it do? But, Ben Bernanke and Company devised Qualitative Easing. Talk about “Critical Thinking”, QE was phenomenal in its Worldwide Impact. The various phases of QE merely was the FED buying bonds from the Financial Industry, placing money into the Economy. The European Central Bank, Bank of Japan, and perhaps others, followed.
The FED’s comments about “at some time, gradually reducing QE”? Now, in the event a reporter fails to emphasize the words “at some time” and “gradually”, the potential impact can be misunderstood. Dedicated reporters (to the financial industry) can miss the significance and, for the small-town newspapers, that can be even more the case. And, the pundits on broadcast media who, in the course of an hour-long show, might discuss: boomer divorce rates; last night’s sports stories; George Zimmerman’s latest escapades; Miley Cyrus and the FED, you just know where their priorities will be.
Generally, the FED tries to change interest rates in quarter-point increments (0.25% or 25 “basis points”); however, there is no hard and fast rule. So, they can increase it by five or ten basis points (0.05%-0.10%) and, in time, gradually raise rates when the Economy would be able to accommodate it. Now, who benefit from lower rates?
The Financial Services Industry certainly benefits from low Interest Rates; because, Cash is its Inventory. Home Builders and Furniture Companies, Ditto. But, those companies, along with Wall Street, definitely haven’t been sharing the “gravy” with the rest of the Country.
As the Economy weakened, the FED did a magnificent job of keeping it from hitting the so-called rock bottom. But, now that there has been a long, gradual recovery, it’s time–eventually and gradually–for the FED to ease back on Monetary Stimulus. Think of a railroad engineer, having a throttle: push forward to speed-up (add to the Money Supply) and pull back completely (apply the brakes means reducing the Cash in play). It appears that the FED realizes that, in time, it should ease up somewhat on the Stimulus, which doesn’t necessarily mean that it will be applying the brakes anytime soon. Also, if the Economy falters, it can always reverse that process.