Chart of the Week: Pressure Builds for More Fed Stimulus
The underwhelming jobs data released in the United States Friday will simply add to the pressure for the Fed to embark on a third round of quantitative easing – but can central banks afford it?
Job creation in the United States remains too weak to put a dent in the country’s unemployment rate, currently hovering at around 8.2%, and was also low enough to spark fears among economists that the European sovereign debt crisis is taking a toll on U.S. business and the economy.
No wonder, then, that the news was promptly followed by a fresh round of speculation that the Federal Reserve will or should embark on “QE3”, a third round of quantitative easing designed to stimulate the U.S. economy. Indeed, a Reuters poll of Wall Street economists working for the primary dealers who do business directly with the Fed, revealed that these pundits believe there’s a 70% chance that the central bank will leap back into the market and make large-scale purchases of Treasury securities.
So far the Fed itself has taken steps to rein in such speculation, firmly rejecting the idea of QE3. Now all eyes will be on Ben Bernanke and his fellow policymakers in search of hints that the dismal jobs data will be enough to change that policy. But another question, highlighted by AlphaNow’s chart of the week, below, must also be taken into consideration: can the Fed, or other central banks, afford much more “quantitative easing”?
Certainly, as the chart above shows all too clearly, there is little room for Bernanke and his fellow central bank honchos to do any more with the most traditional weapon in their arsenal – interest rate levels already have hit rock bottom in the United States, Britain, the eurozone and Japan, as the blue line in the chart indicates. Meanwhile, the size of the balance sheets of these central banks has mounted steadily since the financial crisis to more than $9 trillion. Since the beginning of 2011 alone, some $2.5 trillion has been added to those balance sheets through their purchases of government bonds. How much more can they afford to do?
According to the economists polled by Reuters, the expectation is that QE3 – should it materialize – would be a slightly smaller program. The last two rounds of quantitative easing added $2.3 trillion of mortgage-related debt and Treasury securities to the Fed’s balance sheet as the central bank tried to jumpstart the economy. The median estimate was for a $550 billion QE3 program, possibly focusing on mortgage debt; the highest estimate was $750 billion.
The Bank of England last week led the way, voting to resume its own quantitative easing by allocating 50 billion British pounds toward purchases of debt securities, in hopes of reviving the British economy. Economists’ reactions, as noted in this Reuters News article, were modestly upbeat, although several noted that the program was somewhat more modest than the markets had hoped.
Fed policymakers may well find themselves caught between the proverbial rock and a hard place. On the one hand, if they do act, odds are that Republicans will insist that their action is politically motivated, with the goal of helping President Barack Obama win re-election in November. If they don’t act, Democrats may well charge that they abdicated their responsibility to keep the economy moving forward at even a sputtering pace, especially given the possibility that the so-called fiscal cliff – a combination of tax hikes and spending cuts that are set to automatically kick in if Congress doesn’t act to prevent it – looming on the horizon in 2013.
St. Louis Federal Reserve Bank President James Bullard described QE3 last month as having “a pretty high hurdle.” “We would be taking a lot more risk on our balance sheet,” he said. Our chart of the week confirms that – but what remains an unknown factor in this war of nerves between central bankers and economists is exactly what Bernanke and his colleagues see as making up that hurdle. Are some bad job market data enough to do the trick? There are several weeks between now and the Fed’s next policy meeting, meaning that economists and other pundits likely will be parsing the language of any Fed official in even the most casual conversation with an ever more laser-like intensity.
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