Quantitative Easing Ad Infinitum?

Amy Magnotta, CFA, Brinker Capital

The Federal Open Market Committee (FOMC) launched an open-ended quantitative easing program yesterday. The Fed will purchase $40 billion of Agency mortgage-backed securities (MBS) per month with no specified end date. The Fed will continue its Operation Twist program through December, which includes the purchase of $45 billion per month of longer-dated Treasuries.

The MBS purchases will continue indefinitely until the outlook for the labor market improves “substantially,” which is a different approach than previous easing programs. The Fed also used a communication tool, stating that short-term rates will remain zero-bound until at least mid-2015 (instead of late-2014).

The Fed did not express any concern with inflation, stating it will likely run at or below its 2% objective over the medium term. However, the market is not convinced and inflation expectations moved up significantly after the announcement.

U.S. 5-Year Breakeven Inflation Rate (Source: Bloomberg)U.S. 5-Year Breakeven Inflation Rate

Gold (white) and Silver (orange) Prices (Source: Bloomberg)

The equity markets reacted positively, with the S&P 500 Index gaining +1.6% on the day. An open-ended quantitative easing program may be even more supportive for equities. It is clear the Fed is not ready to stop easing until they see more meaningful and sustainable growth. They want to see more of an improvement in the housing and labor markets. Low rates are here to stay. While the Fed’s actions will increase the risk appetite of investors, we still need help from fiscal policy before year end.

The full FOMC statement can be found here and their updated economic projections here.

Have the Odds of More Quantitative Easing Increased?

Amy Magnotta, CFA, Brinker Capital

Last Friday’s disappointing employment report raises the odds of more quantitative easing by the Fed. Payroll employment increased by only 96,000, and the increases reported in prior months were revised lower. The unemployment rate fell, but only due to a decline in the labor force. The labor force participation rate has fallen to 63.5%, the lowest level since September 1981. With GDP growth of just +1.7%, the U.S. economy is not growing at a pace sufficient to create needed job gains. The chart below shows just how weak job creation has been compared to previous recoveries. (Bureau of Labor Statistics).

Job Creation

This employment report did not offer the Federal Reserve evidence of a “substantial and sustainable strengthening in the pace of the economic recovery”[1] that they are seeking.  As a result, the odds that the Federal Open Market Committee (FOMC) will announce further easing at their meeting on September 12/13 have increased.  Consensus seems to expect additional easing, and a lack of announcement to that effect could disappoint the markets.  There has been talk of an open-ended buying program of U.S. Treasuries and/or mortgage-backed securities.  The FOMC could also extend their rate guidance, perhaps pledging low rates into 2015.

Inflation remains within the Fed’s target level, so they still have room to ease; however, the effectiveness of further monetary policy easing is diminishing.  While the Fed feels obligated to act to fulfill their mandate of economic growth, the bigger problems facing the U.S. economy – the fiscal cliff, the Eurozone crisis and slower growth in China – are outside the Fed’s control.  More certainty surrounding fiscal policy would allow businesses pick up the pace of hiring and investment, boosting economic growth


[1] Ben Bernanke, Federal Reserve Chairman.

Central Banks Once Again Lift Stocks

Joe Preisser, Product Specialist

Stocks listed across the globe rose in dramatic fashion this week, carried on the wings of an announcement made by European Central Bank President, Mario Draghi that a program of unlimited buying of the distressed bonds of the Continent’s heavily indebted nations will be enacted. In a nearly unanimous decision, the ECB’s board endorsed Mr. Draghi’s proposal to reduce sovereign borrowing costs by making large scale purchases of short term debt, ranging in maturities from one to three years in a plan named, “Outright Monetary Transactions” (New York Times). As a means of countering German fears of increasing inflationary pressures through their actions, the money used by the Central Bank to buy the sovereign bonds will be removed from the system elsewhere, thus “sterilizing” the purchases. The bold action of the European Central Bank was characterized by its President as, “a fully effective backstop” for a currency union he deemed, “Irreversible” (New York Times).

The concern over the possible dissolution of the Continent’s monetary union, which has held sway over the global marketplace for the last two and a half years, was diminished by the resolute decision of the European Central Bank to embark on its latest plan to purchase the debt of its most heavily indebted members. Whether this action marks a decisive turning point in the struggle to end the crisis is yet to be determined, as obstacles remain, not least of which are the stipulations that the embattled sovereigns themselves must formally request aid from the Central Bank and adhere to strict conditions in order to be granted assistance. Despite the questions which continue to swirl around this collection of countries, the resolve of its policy makers to maintain their union has been affirmed. Doug Cote, the Chief Market Strategist for ING Investment Management was quoted by the Wall Street Journal, “it seems like there is a very clear and strong commitment that the euro will not only survive, but prosper.”

Speculation that the Federal Reserve Bank of The United States will enact additional measures designed to bolster growth in the world’s largest economy, following next week’s monetary policy meeting, increased in the wake of the release of a disappointing report of job growth for the month of August. According to Bloomberg News, “the economy added 96,000 workers after a revised 141,000 increase in July that was smaller than initially estimated…The median estimate of 92 economists surveyed by Bloomberg called for a gain of 130,000.” The case which Chairman Bernanke made for possibly employing additionally accommodative monetary policies, after the Jackson Hole Symposium on Aug. 31, included language which categorized the current rate of unemployment as a, “grave concern” (New York Times). The lack of progress made toward improving payrolls in the United States, as reflected by the weakness of this report, greatly increases the chances of the Central Bank taking action, which will be supportive of risk based assets. Michelle Meyer, senior U.S. economist at Bank of America was quoted as saying, “The Fed will not stand idle in the face of subpar growth, we expect additional balance sheet expansion before year-end, with a growing probability of an open-ended QE program tied to healing in the economy” (Wall Street Journal).