QE4?

by Michael J. Howell12. December 2012 18:27

Todays Fed Statement and the similar tone taken by a recent speech from in-coming BoE Governor Carney both show the shift of thinking away from inflation and towards employment as the general 2013-14 policy goal. The Fed as expected emphasised the 'US$85 billion' monthly figure of new injections of cash and cleared any doubts that it might be compromised by the slated end to 'Operation Twist'. It may be a moot point whether this constitutes an increase on the previous QE3 and so can rightly be labelled a QE4. Whichever, investors must view these collective statements by policy-makers as events in 2012 but as processes for 2013. The two key things to focus on are (1) starting point and (2) future delivery. The starting point in 2012 is from a relatively low liquidity point, ie on our measures the Fed is still quite tight. Thus we are fed up of seeing the now standard Central Bank balance sheet graph in the Press showing strong rises since 2008. We simple cannot compare the Fed the BoJ the BoE and he ECB by their absolute balance sheet sizes without taking into account their institutional structures. In short our measures confirm that CBs have much room to ease. Second, promises are one thing and delivery is another. The previous post touched on why the Fed has not delivered yet. Therefore, see this renewed QE3 as a general easing process through 2013. Moreover others will join. Next up the BoJ?

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