QE2 Won't Boost Economy, Poll Says
NEW YORK (
) -- With the market pricing in further quantitative easing from the
Federal Reserve
, investors are waiting with bated breath for further details from the Fed on the size of the bond purchase program.
Consensus is expecting the size of the Fed purchases to be in the range of $100 billion a month. "Less than that will be "bad" news, and more than that will be "good" news. But a lot more will be "bad" news,"
writes Paul Kedrosky, a contributor to
TheStreet
.
The market is hoping that the size of the monetary stimulus is large enough to boost higher risk appetite and drive up stocks in the short term. But investors are unlikely to cheer if the size of the program is too large, as they remain largely skeptical of the long-term effectiveness of QE2.
Most investors are inclined to think that the Fed will fail in its attempt to boost the economy through quantitative easing and will merely bid up the prices of financial assets. In a
poll conducted over the past two weeks, more than 70% of the respondents said they think the Fed risks runaway inflation by embarking on another round of quantitative easing.
Slightly less than 20% felt that the economy could get a boost if the size of the bond purchase program was "just right."
Only 9% believed the Fed was actually on the right track, that its plans for further easing and communication of inflation objectives would drive up inflationary expectations enough to lead to higher spending and investment.
Fed Chairman Ben Bernanke is making one more attempt to boost the economy as unemployment remains at unsustainably high levels and inflation stays dangerously low, with deflation a looming threat.
On Friday, the government said the
economy expanded 2% in the third quarter, in line with market expectations but still not high enough to generate jobs. The
economy shed 95,000 jobs last month, with the private sector adding only 64,000 workers. On Friday, the Labor Department is expected to report that nonfarm payrolls grew by 60,000, according to consensus estimates from
Briefing.com.
The Fed would normally resort to cutting interest rates to stimulate growth but with the federal funds rate already near zero, there is little the central bank can do on this front. That leaves more non-conventional policies such as expanding the central bank's balance sheet through the purchase of long-term assets such as treasury securities.
But even the Fed is uncertain about the economic impact of such a move. "One disadvantage of asset purchases relative to conventional monetary policy is that we have much less experience in judging the economic effects of this policy instrument, which makes it challenging to determine the appropriate quantity and pace of purchases and to communicate this policy response to the public," Bernanke noted in his October 15 speech. "These factors have dictated that the Federal Open Market Committee proceed with some caution in deciding whether to engage in further purchases of longer-term securities."
The uncertainty of its impact is one reason why the Fed is expected to launch a more measured bond buying program. A more calibrated move will help the central bank scale back its bond purchases if the economy and inflation recovers faster than expected.
But critics say that while inflation can be stoked, it cannot be controlled. The Fed could be too successful in its efforts. If consumers spend more and the economy expands, prices could rapidly rise to unacceptable levels. Long-term yields would eventually climb as inflation expectations rise, hurting credit. The Fed may be forced to raise rates to cool prices, which could cause asset prices fueled by lower interest rates to crash.
Others worry that the Fed could completely fail in its attempt to raise inflationary expectations in the first place. Its massive quantitative easing would hurt the dollar, bidding up prices of oil and commodities that could hurt businesses, while doing nothing to stimulate housing and final product demand.
Everything hinges on the central bank's ability to correctly predict the right time to withdraw life support for the markets and the economy. Investors are reluctant to make big bets on the Fed getting that right.
-- Written by Shanthi Venkataraman in New York
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