The Federal Reserve today announced it will slow the third round of “quantitative easing” (QE3), reducing the Fed’s purchase of government bonds from a rate of $85 billion per month to $75 billion per month, and will not raise interest rates.
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“The Fed used today’s statement to try and dig itself out of a hole it had dug for itself. It did a reasonably good job of taking its first step.
“Market participants had assumed the Fed’s announced QE3 plan to purchase $85 billion a month in securities was the basis for its expansive monetary policy. Even when Fed Chairman Ben Bernanke tried to explain how QE3 was not directly related to its monetary actions, few took him at his word.
“QE3 is not directly tied to the Fed’s monetary policy because the Fed can and has made other adjustments to offset its announced purchases. Keynesians at the Fed announced QE3 to reduce long-term interest rates by influencing market psychology. However, in the year since QE3 was fully announced, long-term rates have increased by over one percentage point. Hence, the attempt to affect psychology failed.
“Among the Fed’s many self-induced problems was how to wean market participants from a failed program. Since market participants would not accept the idea QE3 was unrelated to its monetary policy, the Fed had to slowly and carefully wean investors from its QE3 placebo-elixir. It did so by combining the announcement of a modest reduction of $10 billion in its monthly purchases with reassurances regarding its expansive monetary intentions and qualifications for a return to the placebo-elixir if it became necessary.
“Judging from the reaction in the stock market, the Fed made a successful first step at extricating itself from one mistake. It will have a far more difficult time extricating itself from an even bigger mistake-the massive $3 trillion plus increase in its balance sheet.”
“Going from $85 billion to $75 billion a month in money creation is virtually meaningless, while the commitment to go much longer with interest rates near zero continues the Fed’s war on savers, conservative investors, and persons living on fixed incomes. Whenever Fed officials speak of manipulating interest rates, money supply, or other aspects of the economy, they speak of manipulating people. Fed manipulations cause booms and busts as people respond to the manipulations. The only sure thing from the Fed’s policies is that another bust is on the way.”
“The Federal Reserve’s announcement today that it is ‘easing’ back on quantitative easing basically leaves current monetary policy unchanged. Instead of its $85 billion of monthly purchases of U.S. Treasury and mortgage-backed securities, it will be reduced to $75 billion a month.
“This means that in comparison to the $1.02 trillion of new money that the Federal Reserve created in 2013, the ‘trimmed’ quantitative easing would ‘only’ inject $900 billion of additional money into the financial system and the economy in 2014. Furthermore, the Federal Reserve insisted that it would continue to keep key short-term interest rates practically at zero. This means that for the foreseeable future, America’s central bank will continue to prevent financial markets from working properly.
“Interest rates are market prices that bring savers and borrowers together and in balance with each other for sustainable resource use and investment decision-making. Federal Reserve interest rate policy amounts to a continuation of a price control that creates and perpetuates potential distortions and imbalances by not allowing financial markets from correctly setting the price to borrow and lend.
“This means that the ‘trimmed’ quantitative easing and interest rate manipulation continues to threaten investment instability and the danger of another boom bust cycle further down the road.”
“The Fed’s highly expansive monetary policy unfortunately has primarily encouraged an increase in the demand for existing assets, hence the asset bubbles, rather than in new investment. The result has been a boom in the stock market but inadequate returns for savers. Moreover, low rates encourage both increased borrowing and the pursuit of higher returns through riskier investments. Did we learn nothing from the last crisis?
“Expansive monetary policy works most effectively if accompanied by tax cuts and less regulation. Unfortunately, the present administration has been following the opposite course. Adding to these problems has been far-reaching and confusing legislation such as Obamacare, Dodd-Frank, and the Volcker rule. Thus economic growth has been inadequate and unemployment stubbornly high.”
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