Quantitative Easing Revisited

Member Group : Lincoln Institute

By the end of the year 2014, the results and the impact of the Federal Reserve’s quantitative easing programs should be clearly known. It is anticipated widely that the Fed will eliminate quantitative easing during October 2014.

In the July FOMC minutes, the Federal Reserve directed the continued monetary easing at the level of $25 billion per month down substantially from the $85 billion per month at the beginning of this year and during the prior year’s since 2009.

For most Americans, the impact in the importance of this decision by the Federal Reserve will be of little importance. However, this decision may be one of the most important decisions made this decade in terms of its impact on your life and the lives of your children and your family.

The importance of the decision lies at the heart of the Federal open market committee’s minutes. The committee expressed concern as it relates to low and declining risk premiums, low levels of market volatility, and a loosening of underwriting standards.

The following statement from the FOMC minutes in July should raise concern.

"The staff’s periodic report on potential risks to financial
stability concluded that relatively strong capital positions
of U.S. banks, subdued use of maturity transformation
and leverage within the broader financial sector, and relatively
low levels of leverage for the aggregate nonfinancial
sector were important factors supporting overall financial
stability. However, the staff report also highlighted
that low and declining risk premiums, low levels
of market volatility, and a loosening of underwriting
standards in a number of markets raised somewhat the
risk of an eventual correction in asset valuations."

The dangers expressed by the Federal Reserve in its minutes relative to consumer spending, inflation, European sovereign debt, Russia, the concerns in Israel, cause the Fed to reiterate its very low interest rate policies for the near term but signaling a desire to end quantitative easing.

On the surface of it, the end of the over $4.4 trillion of monetary easing would be applauded by most conservatives and many in the stock market.

When the Federal Reserve eliminates the stimulus that has been artificially holding up the economy, the impact of removing this crutch will be felt quickly.

The low levels of market volatility and the "eventual correction in asset valuations" in light of all the other anemic economic indicators tells me to be prepared for a major stock market correction after October 2014.

The $4.4 trillion that has been pumped into the monetary supply and the world’s markets by the Federal Reserve has stimulated a bubble in the stock market that is very likely to make the bubble in the real estate market look insignificant.

The Federal Reserve’s minutes clearly indicate that despite unparalleled monetary stimulation there is still tremendous uncertainty in the housing market, the labor market, and consumer spending.

Despite all of the stimulus and excessive federal spending the economic results have been lackluster at best during this "recovery". During August, the Federal Reserve is merely reducing quantitative easing and continuing its trend towards eliminating monetary easing. With one exception it has not yet even begun to talk about reducing from the market the $4.4 trillion in easy money.

With the Federal Reserve is missing with its policies is that the Fed is not solving the problem of removing uncertainty in the economy, and our government, and in the massive regulatory burdens placed on our society. Instead the Fed is merely delaying the inevitable and making future corrections potentially more severe.

All the Federal Reserve has done is finance the world markets and US economy with dollars. The Fed cannot affect any of the other issues of governmental excess in the United States. In reality the Federal Reserve has inadvertently or perhaps deliberately set the economy up for significant failure when it removes the crutch of easy money.

Should the Federal Reserve end quantitative easing in October 2014, I would anticipate that we will all know very shortly whether or not the new Fed policy has merely delayed the correction in the US economy that we have been trying to avoid. The Fed’s policies may actually make any future recession even more severe.

I was told as a child there is no such thing as a free lunch. I think all of us in this country are about to find out that that expression is true whether we like it or not. A $4.4 Trillion lunch will lead to indigestion and heartburn!

Col. Frank Ryan, CPA, USMCR (Ret) and served in Iraq and briefly in Afghanistan and specializes in corporate restructuring and lectures on ethics for the state CPA societies. He has served on numerous boards of publicly traded and non-profit organizations. He can be reached at [email protected] and twitter at @fryan1951.