The Federal Open Markets Committee will announced a new round of quantitative easing at 2:15 PM (QE2).For a reminder of what quantitative easing is click here >
The plan is for the Fed to spend a specific amount of money over a certain time period purchasing securities. The purchases are likely to be limited to U.S. government securities, rather than the ETF’s or corporate debt mentioned by the Bank of Japan in their own strategy (yet to be enacted).
The goal of these purchases is to:
- Pump up asset values by stimulating spending
- Drive inflation in the U.S. economy
- Prevent deflation
The side effects of these purchases are:
- A weakening in the dollar
- An increase in hot money flowing to emerging markets
- The potential for long term inflation in the U.S. economy
Economists are expecting the Fed to commit to the purchase of $500 billion in securities, according to a Bloomberg survey.
Nomura don’t think the Fed will go for anything more than $500 billion, however, the Fed may be a bit crafty with how they talk about rolling over the debt, to suggest QE2 will be much larger.
Marc Faber has suggested anything less than $1 trillion for QE2 would trigger a correction.
With that $500 billion to $1 trillion range in place, Deutsche Bank have had the most specific prediction for QE2’s size and duration. Deutsche Bank suggest a $125 billion limit on purchases over a 6-week period.
That means the potential is for more than $1 trillion over a 12 month period, but a smaller real amount.
With positive economic news on manufacturing, the services sector, and employment surfacing early this week, it is likely the Fed constrains its ambitions and goes for something in the middle, or at least includes the moderate tactic of the 6-week spending limit.
Or the Fed, according to some, will just do what the street expects, whatever that is (likely $500 billion).
That being said, there are a lot of reasons why QE2 won’t work.
Right now, the problem is not an absence of funds in the system, but a lack of demand. Businesses are concerned about future spending by consumers, so they’re not spending either. No demand, and all this Fed money just sits in bank coffers, not making any money on an extremely low interest rate.
QE2’s impact may not be felt at all, and that’s why a more moderate approach may be used to allow the Fed, and its more hawkish members (here’s where all the Fed members stand on QE), to keep watch over its impact.
But its likely the Fed keeps doing QE, regardless of the perceived results, because markets will continue to expect it as a tool to overcome economic weakening.
So today is just the first salvo in what could become QE X.