It’s widely expected that at the end of this month, the Federal Reserve will end its third round of quantitative easing (that began in September of 2012). This is QE3, where the Federal Reserve was printing $85.0 billion of new money every month and using it to buy U.S. Treasuries and mortgage-backed securities (MBS). In the beginning of 2014, the Fed started reducing the amount of money it was printing each month.
Is there another round of quantitative easing (more commonly known as QE) coming?
Here’s why I ask…
First, U.S. long-term bond yields are collapsing. Back in 2013, when the Federal Reserve hinted that it might move away from quantitative easing, we saw U.S. bond yields soar. Between May and December of 2013, yields on the U.S. 10-year notes almost doubled. But since then the unexpected happened.
Chart courtesy of www.StockCharts.com
Since the beginning of 2014, the yields on the same bonds have plunged 30%. Despite the Federal Reserve telling us it expects to raise interest rates in 2015 and 2016 (which would be catastrophic for bonds), bond prices are rising… Odd, to say the least.
Second, I hear hints about QE4 from key members of the Federal Reserve. In an interview with Reuters, the president of the Federal Reserve Bank of San Francisco said, “If we really get a sustained, disinflationary forecast…then I think moving back to additional asset purchases in a situation like that should be something we should seriously consider.” (Source: “Exclusive: Fed’s Williams downplays global risks, eyes U.S. inflation,” Reuters, October 14, 2014.)
In other words, if inflation in the U.S. economy doesn’t meet the Federal Reserve’s target of two percent, then the Fed should reconsider its thoughts on quantitative easing. Sadly, according to the official figures, inflation in the U.S. economy for the first eight months of the year was just 1.3%—well below what the Federal Reserve wants. (Source: Bureau of Labor Statistics web site, last accessed October 15, 2014.)
Third, the U.S. economy is showing signs of weakness as economic data suggest the so-called recovery is stalling. Retail sales are down. Unemployment (when you include people who have given up looking for work and those who have part-time jobs because they can’t get full-time jobs) is still a huge overhang on the economy five years after the financial crisis.
To fight this issue, the Federal Reserve may do what it has been doing since the Great Recession—print more money and hope for growth.
Finally, if the stock market crashes further, I believe it will be in the Fed’s best interest to come in and support the market. After all, a falling stock market would damage consumer confidence, which would push retail sales and corporate profits down. Here come the layoffs!