Tuesday, 28 Sep 2010 02:15 PM
By: David Frazier
There’s been a lot of discussion since the Federal Reserve
released its latest monetary policy statement on Sept. 21
regarding the Fed’s purported plans to soon begin a new round of
quantitative easing.
Yesterday, CNBC went so far as to conduct a poll asking
economists, market strategists, and money managers to state the
degree to which they expect the Fed to increase its purchases of
government and government agency securities during the months
ahead.
Persons who responded to that poll said, on average, that they
expect the Fed to purchase approximately $500 billion of U.S.
government and government agency securities during a six-month
period beginning this November. Mark Zandi, of Moody’s
Economy.Com, said that he thinks the Fed will purchase $1
trillion of government and government agency securities during
the coming months.
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Plan”
Although I expect the Fed to increase its purchases of
mortgage-backed securities during the next few months in an
effort to stimulate the housing market, my research suggests
that any purchases of government and government agency
securities will fail to stimulate the overall economy.
That’s because, primarily, U.S. employers have indicated that
they plan to reduce the sizes of their workforces during at
least the next few months, and because the U.S. banks already
have more than $1 trillion in deposits to lend to their
customers as a result of the massive amount of U.S. government
securities that the Fed purchased during the past two years.
As an example of employers' plans to reduce the sizes of their
workforces, global outplacement firm Challenger, Gray &
Christmas announced on Sept. 1 that results of its latest
monthly survey of U.S. employers showed that those employers
plan to reduce their workforces by approximately 21,000 persons
during the three months ending Nov. 30, 2010.
Separately, economic forecasting firm The Conference Board
announced on the same day that U.S. employers posted 57,000
fewer job advertisements during August than they did during the
prior month.
In light of the fact that both short-term and long-term
borrowing rates, including mortgage rates, are currently near
their lowest level on record, and that the confidence levels of
Americans fell sharply during the past few months, I don’t
expect the Fed to begin a new round of quantitative easing – of
massive purchases of U.S. government and government agency
securities. Quite the contrary, my research suggests that the
Fed will limit its amount of government securities purchases
during the months ahead.
If my forecast turns out to be correct, there’s a good chance
that stock prices will soon pull back sharply. That’s because
much of the recent run-up in stocks was due to investors’
assumption that the Fed will enter a new round of quantitative
easing.
Note from Moneynews:
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About the Author:
David
Frazier
David Frazier is a member of the Moneynews Financial Brain
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