Showing posts with label QE2. Show all posts
Showing posts with label QE2. Show all posts

Tuesday, December 7, 2010

Recent economic data releases: what's really going on

Two recent releases economic data releases raise grave questions. We refer to the following:

A. "The Fed cuts US economy growth estimate for 2011 and ups unemployment. The Federal Reserve has cut its 2011 growth forecast for the US economy, newly released minutes of its last policy committee meeting reveal. The Fed expects growth of 3-3.6% next year, down from its previous 3.5-4.2% estimate. It also forecasts higher unemployment and lower inflation than before."

B. "After holding steady for three months, the U.S. unemployment rate rose to 9.8 percent in November, according to the U.S. Bureau of Labor Statistics.The report out Friday was a letdown for the country’s economics, many of whom had predicted much larger job growth figures. The disappointing news was another sign that the nation’s economy remains in a fragile state."

What's really going on.

The Federal Reserve faced a firestorm of criticism after implementing QE2, or Quantitative Easing Number Two. We forecast that unemployment would decline in November. So, what happened? Nothing. Unemployment actually fell. It is not yet reflected in the numbers for several reasons:

1. The Fed does not want economic indicators to show progress, at least not yet. To do so would raise questions about the timing of QE2. We expect the November unemployment numbers to be revised downward in January or February, 2011.

2. Likewise, GDP growth of 3.5% to 4% would, again, raise questions about the appropriateness of QE2.

Why would the Fed do this?

Economic policy in this day and age is all about managing expectations. By showing higher unemployment and lower growth, the Fed justifies QE2 and sets the stage for "surprising" increases in economic growth and "unanticipated" declines in unemployment during the first half of 2011.

We stand by our forecast: we expect U.S. employment to grow, unemployment to fall, and spending to recover over the coming months. (We do note, however, certain portions of our long term social and financial return forecast, the Fully Adjusted Return ® Forecast, have changed. Specifically, our forecast concerning the U.S. banking sector has turned markedly negative. Click here to review our track record with respect to the market crisis.)

Wednesday, November 3, 2010

Federal Reserve Board QE2 - $600 billion, $75 billion at a time...

According to the Fed, "To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to expand its holdings of securities. The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month. The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability."

$600 billion is $100 billion larger than anticipated and $75 billion per month seems reasonable. This is an appropriate response and stands every chance of being effective, especially since economic activity has been strengthening in the weeks leading up to this announcement.

From a social investing perspective, the Fed's new focus on employment (as opposed to inflation) is a welcome change. Monetary policies that primarily seek to limit inflation risk (inflation targeting) tend to serve the needs of asset holders, since inflation first impacts and reduces asset values. These type of asset focused monetary policies are inappropriate and ineffective in the current, ongoing crisis. Why? With a record number of foreclosures, there are fewer and fewer asset holders. Income inequality is increasing rapidly as assets are being concentrated in fewer and fewer hands.

A concern with an "increase in long-term inflation expectations that could destabilize the economy" is misplaced. The larger, more immediate and significant risk for society and the economy resides in the possibility of an increase in both short and long-term unemployment, since this could destabilize both the economy and the political system (as we saw last night). Better to seek to increase social return/benefits by putting people in a position to acquire assets. This is done through employment.