The FED & Quantitative Easing 2

by Stephan Smith on October 31, 2010

With low inflation and even deflation still on the minds of the Federal Open Market Committee [FOMC] and the United States economy not recovering as quickly as the FOMC would like, the Federal Reserve has been talking about easing monetary policy further if the economic and financial outlook continues to deteriorate, by possibly performing another round of quantitative easing; known as quantitative easing 2 [QE2 or QEII or QE Lite (depending on the scale of the additional asset purchases)].

Table Of Contents

As I mentioned in my previous post titled “The FED Is Ready For Additional Quantitative Easing“, according to the FOMC’s September 21st 2010 monetary policy press release

“The Committee will continue to monitor the economic outlook and financial developments and is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate.”

Many currency traders have been shorting the United States Dollar [USD] since the FOMC’s September 21th 2010 monetary policy press release in anticipation of additional quantitative easing. The Euro, the Australian Dollar, the British Pound, the Canadian Dollar and other major currencies have strengthen moderately against the greenback since the press relelase.

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Bullish Economic Developments
However, recent economic developments in the United States have given currency traders doubts on whether the FOMC will even go through with its second anticipated quantitative easing policy. According to the September 2010 advanced report on durable goods, new orders of manufactured durable goods increased 3.3 percent. That is 1.7 percentage points higher than what the experts anticipated. This is definitely good news for the U.S. economy and takes some pressures off the FOMC and the need to perform additional quantitative easing.

BullExisting home sales and new home sales also helped to take some pressures off the FOMC and the necessity for additional easing. According to the September 2010 existing home sales press release, the seasonally adjusted annual rate of existing home sales during September 2010 was 4.53 million; which is up from August’s 4.12 million seasonally adjusted annual rate of existing home sales. Unfortunately, year over year, existing homes sales contracted by a whopping 19.1 percent. Even with that statistic the National Association of Realtors is still optimistic. According to the press release…

“Existing-home sales rose again in September, affirming that a sales recovery has begun…”

New homes sales also beat expectations during the month of September 2010. According to the New Residential Sales in September 2010 report, sales of single family homes were at the seasonally adjusted annual rate of 307,000; that’s up from 288,000 during August 2010. That’s 6.6 percent growth from August to September. Excellent news.

The United States’ GDP is another bullish economic development. The Bureau of Economic Analysis stated that the U.S. GDP increased by annualized rate of 2 percent from the second quarter to the third quarter of 2010. That is up 0.3 percentage points from the first quarter to the second quarter of 2010. Though growth here is soft, it is nonetheless, growth.

Wall Street Journal Notices
WSJ LogoWith the latest fundamental economic development being bullish for the U.S. economy, currency traders are becoming uneasy on their short positions of the USD. Will the FED purchase less assets since the latest numbers are looking more optimistic or will the FED postpone or even eliminate any additional asset purchases? These are questions that are being asked by many investors. Publications such as the Wall Street Journal are also noticing the concerns of investors regarding QE2.

“Concerns that the Federal Reserve may not buy bonds on a massive scale, as some had expected, led to selling and less demand for $35 billion of Treasury securities auctioned Wednesday.”

Prabha Natarajan – Wall Street Journal

John Taylor, Jr
Let’s pause here for a minute. Even if the FED ends up performing another around of quantitative easing, John Taylor, Jr., founder of FX Concepts, Inc and manager of the largest currency hedge fund in the world, believes that the QE2 has already priced into the USD. Which means that the current strength USD is roughly where it should be if the FED went ahead and started its quantitative easing policy today. Watch the video below.

USD Technical Analysis
What John Taylor, Jr. is saying definitely makes sense if you look at the USD technically.

Upcoming FOMC Meeting
There is definitely much anticipation over the next FOMC meeting. The next meeting announcement is scheduled on take place on November 3rd, 2010.

CNN Covers Quantitative Easing 2
The staff at CNN are definitely keeping an eye on the FED. In the video below, they discuss what quantitative easing 2 is and how it affects us (meaning you and me…everyone).

Former FED Chairman Paul Volcker
Paul VolckerEconomists around the world can’t seem to agree as to what the outcome will be once the FED starts another around of asset purchases. Many economists are optimistic; thinking that additional quantitative easing will do what it is meant to do, that is help spur the economy into a stronger recovery and push inflation higher while easing concerns regarding deflation. However, there are many economists who are more on the pessimistic side; believing that additional quantitative easing will do more harm than good. One major voice in the pessimistic group is no other than Paul Volcker, former chairman of the Federal Reserve.

“When you get interest rates as low as they are, they can’t go much lower, so I don’t look for any overpowering results of this action…”

- Paul Volcker, Former Chairman of the Federal Reserve – MoneyControl

Paul Volcker also warned about the risk of high inflation.

“When money is too easy for too long, we will have more asset bubbles.”

- Paul Volcker, Former Chairman of the Federal Reserve – TodayOnline

With only one more day until the FED monetary policy meeting announcement, the currency markets are definitely quiet as the entire world waits on the words that is to come from the Federal Reserve.

Section Date: November 3rd, 2010

The monster that is QE2 has been released!

The Federal Reserve is going to Pump $600 Billion Dollars into the U.S. Economy

The FED has pulled the trigger and is going full stream ahead with quantitative easing 2. According to the FOMC, the U.S. economy is still recovering slowly, the housing market is still weak and unemployment is still high; not to mention that inflation continues to be on the low side.

So in response to their findings, the Federal Reserve, in an effort to promote a strong recovery, is going to start pumping $75 billion dollars every month into the U.S. economy until it hits $600 billion dollars.

“To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to expand its holdings of securities.

The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month.

The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability.”

- Federal Open Market Committee, November 3rd Monetary Press Release

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