This weekend the Fed will conduct its annual conference in Jackson Hole, Wyoming. With the exception that CPI Core inflation is running at 1.8% this year versus 0.9% last August, the agenda at this year’s conference will be remarkably similar.
As with last year’s meeting, the U.S economy has hit a soft patch. As with last year, the Fed his being looked to for answers. However unlike last year, the Fed is almost out of ammo. All it can really do is move its bond holdings farther out on the yield curve. This would permit the Fed to keep policy accommodation in place and keep long-term rates low. QE, like traditional easing, can be and should be inflationary. This is why long-term rates rose IN SPITE of increased Fed purchases of debt during QE2.
Some believe (equity market participants) that the Fed is poised to announce or at least hint at QE3. Good luck with that. The benefits of QE are so diminished at this point that even if new bond purchases would be on the long end of the curve, long-term rates would probably rise somewhat as market participants hit the Fed’s bid until the economy slows again when they resume buying long-dated treasuries.
The problems with the U.S. economy are of a structural nature. All the cyclical tools in the world are not going to fix these problems. Making the U.S. more business friendly on the tax, regulation and labor cost front are what is needed. When housing finally clears in another five years or so the healing will pick up speed. This is providing that the structural problems are rectified. Until then, the words slow and arduous will be used to describe U.S. economic growth.
No comments:
Post a Comment