If the US Federal Reserve were to launch a third round of quantitative easing, there would be clear benefits for people exchanging currencies.
For instance, risk-based currencies such as the Australian and New Zealand dollars would likely rise, as would the euro. The US dollar, Japanese pound and UK pound meanwhile would likely lose out. (This is because these latter currencies are ‘safe havens,’ and so benefit most when global economic pessimism is high.)
Hence, if you’re in Australia or the Eurozone, and intending to repatriate funds to the US or UK, more quantitative easing from the Fed would be just the ticket. It would enable you to buy more pounds and dollars, making property in the States and Britain less expensive, and help your capital go further when you move it to your bank account back home.
Given that then, how likely is it the Fed will announce QE3? It’s been the talk of the foreign exchange market for at least six weeks now, with investors backing and forthing about the fact that, well, the US economy isn’t doing so good, which makes injecting more stimulus more likely, but on the other hand the presidential election’s in November, and the Fed won’t want to be seen as meddling…
Hence, in this post, I want to look at the arguments for and against the Fed announcing more QE very soon, to put you in a better position when you do decide to exchange currencies.
The Presidential Election and the Fed’s Independence
One factor likely to influence the Fed decision to announce more stimulus or not soon is the Presidential election in November.
The idea is that, if the Fed announces QE3 before the poll, and the economy improves, it would benefit the chances of the incumbent Barack Obama, who would likely receive the economic credit among voters. This of course would make it look like the Fed favoured the Democrats.
Yet at the same time, the Fed is intended as an independent central bank, and as such should be able to act independent of political considerations, in as much as it helps it achieve its dual mandates of 1) battling inflation and 2) cutting unemployment.
So how much of an influence is the Presidential election having on the Fed’s thinking right now? Well, interestingly enough, this is a debate that seems to be raging inside the Fed itself.
Last month Richard Fisher, president of the Dallas Fed (each state has its own Fed) said that: “… as we get closer to election season, that people in the marketplace or elsewhere might draw that conclusion [i.e. suspect the Fed is influencing the poll], and it might come back to haunt us.”
In other words, in spite of the fact that the Fed is meant to be independent, Mr. Fisher is well aware that the central bank’s actions will be interpreted politically, which could ultimately hurt the Federal Reserve. In this sense, the Fed is less likely to act in the next three months.
Yet equally, last month as well, Boston Fed President Eric Rosengren seemed to suggest the Fed’s independence means it should rise above political considerations, and do what’s best for the economy. He said, “If there’s a slowdown and you have an independent central bank, the appropriate response is to act.”
So it could go both ways. Of course, it’s important to note that neither of these men are in the Fed’s Open Market Committee at present, which decides policy, meaning they have no direct influence over whether there’s more quantitative easing. Nonetheless, it’s likely the same arguments are being played out within the FOMC too.
Ups and Downs in US Economic Performance
If we ignore politics, then the argument for whether the Fed announces more quantitative easing rests purely with how the US economy is performing. If the economy is moving so slowly that unemployment isn’t falling, then the Federal Reserve is technically mandated to do something about it. So how’s it doing?
Just as it’s been for several months, its performance is mixed today.
This week retail sales jumped 0.8%, far above forecasts for a 0.3% climb. This signals US consumers are getting their groove back in a big way. Similarly, US industrial production gained 0.6% in July, much higher than the 0.1% performance in June. Both these things signal the US will not need to inject more stimulus, insofar that the economy can stand on its own two feet.
Yet equally, the Philadelphia Fed manufacturing index fell to –7.1 last month, bigger than a predicted fall to –5.0. And the US has both been creating fewer jobs, and expanding more slowly, for quite some time. That, some argue, means the time is more than ripe for stimulus.
Quantitative Easing Not A Great White Hope After All?
Last of all, the Fed’s own attitude to quantitative easing will determine whether it pursues the policy. And in this respect, there is also a lot of internal debate. For instance, this week Philadelphia Fed President Charles Plosser said that “The evidence is not strong that somehow more [QE] is going to help the unemployment rate move faster to where we’d like it to be.”
This obviously suggests that, insofar as the policy is ineffective, it is not worth pursuing. That sentiment is echoed too by Jeffrey Lacker, president of the Federal Reserve Bank of Richmond. He says: “There are a lot of people overestimating the extent to which monetary policy is capable of having any sustained effect on growth or labor markets.”
But if these men are bearish about the effect of stimulus, there are those inside the Fed, such as Chairman Ben Bernanke, who still believe it effective.
So will the Fed act in the next few months? Well, as you may have gathered, it is by no means a sure thing. The arguments for and against stimulus span political and economic spheres, both inside and out of the Fed. Nonetheless, knowing this, and knowing that QE3 would be good if you want to buy pounds or US dollars, you can keep an eye on the Fed’s decision, and act accordingly.
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