Earlier we were complaining about the number of people who were arguing that the European disaster was effectively a new round of quantitative easing, since the panic has driven rates lower, and ostensibly that’s what Fed action is supposed to do.
This is really nonsense on stilts. QE is supposed to promote growth, inflation, and the transmission of money out of Treasuries and into riskier assets. The European implosion has done the opposite of all of that.
And yet serious people keep bring up the Europe = QE canard.
For example, here’s a report from UBS’ Maury N. Harris weighing the prospects of more QE:
As mentioned, we do not see this report as being sufficient for the Federal Reserve to move toward further easing at the June meeting. It is unclear what the Fed could achieve with regard to interest rates given what has already occurred. Indeed, we would argue that the continuing concerns around Europe has driven yields lower and effectively acted as an additional round of quantitative easing for the Fed. Additionally, given the strength of the Yen, it seems likely that the Fed would anticipate some foreign exchange intervention and the ensuing recycling of the dollars bought back into the US Treasury market, potentially further pressuring yields lower.
A better take comes from Morgan Stanley’s Vincent Reinhart, who sees more QE on the horizon, as Sam Ro wrote about earlier.
In that same report, Reinhart produces a chart of Morgan Stanley’s proprietary “financial conditions” index.
Photo: Morgan Stanley
As you can see, financial conditions got looser and looser after the MEP (Maturities Extension Program AKA Operation Twist) and the big coordinated intervention agreement, which is the goal of all these programs. Lately though, as Europe has re-deteriorated, financial conditions have been getting tighter, which is the opposite of the goal of these programs.
So let’s say it again: The Euro Collapse is not the same as Fed easing, just because it’s driven rates down.