Fed Considering Using Quantitative Easing “More Readily”

Fed Considering Using Quantitative Easing “More Readily” from Schiff Gold

Once upon a time, quantitative easing was considered an “extreme measure.” But it may become more commonplace. According to a Reuters report, central bankers in the US are discussing whether they should turn to that “tool” more often.

In other words, the Fed may make the “extreme” the norm.

Last Friday, San Francisco Federal Reserve Bank President Mary Daly said they were discussing whether QE bond-buying should be an emergency measure only, or if the central bank should use the tool more regularly.

In the financial crisis, in the aftermath of that when we were trying to help the economy, we engaged in these quantitative easing policies, and an important question is, should those always be in the tool kit — should you always have those at your ready — or should you think about those are only tools you use when you really hit the zero lower bound and you have no other things you can do.”

She went on to say she could envision a scenario where interest rate cuts were the primary tool and expanding the Fed’s balance sheet was a secondary tool, “but one that you would use more readily.”

That’s not decided yet, but it’s part of what we are discussing now.”

As one cynical poster on Twitter described the potential new policy this way.

The year is 2021. The Fed institutes QE every time the S&P drops 50bps.”

Cynical, but not necessarily wrong.

As Peter Schiff said in a recent podcast, the only thing that’s changed in recent weeks to justify the “Powell Pause” in rate hikes is the drop in the stock market.

Now here we are just a few months later. Nothing has actually changed with the overall economy. Yes, we had a government shutdown; the government shutdown is over. Not that big a deal. I mean, there has been weak economic data, but there’s been weak economic data that the Fed has been ignoring the entire time … The only thing that’s really changed between the September meeting and today is a bear market in stocks. The bear market that happened in the fourth quarter of last year and the acceleration of the downtrend that accompanied the last rate hike the Fed delivered in December. That’s the only substantive difference between now and then. And that’s the only reason the Federal Reserve has done a complete 180 when it comes to monetary policy.”

In effect, QE is a fancy term for printing lots of money. The Fed uses these newly minted greenbacks to buy securities or government bonds, thereby putting the new cash directly into circulation. The Fed can buy US Treasuries, thereby monetizing government debt. It can also buy things like mortgage-backed securities as it did during QE1, allowing big banks to remove these worthless assets from their balance sheets. The Fed hoped this would encourage the banks to lend out money again and ease the credit crunch.

In the wake of the 2008 financial crisis, the Fed quickly pushed interest rates down to zero. With that gun empty, it began quantitative easing. Over a span of nearly seven years, the Fed’s balance sheet increased 427%. According to a MarketSlant article, the central bank did $3,625 billion of QE. You can learn more about the mechanism of QE HERE.

Not so long ago, using QE was considered a radical policy. It was a strong drug necessary in the moment. But today, the economy is addicted to easy money. And like every drug user, it needs a bigger and bigger fix to get the same “high.” We’ve seen what happens when the pusher tries to wean the addict off the drug in recent months.

The Fed began the balance sheet roll-off in October 2017. At that point, it had grown to $4.5 trillion after three rounds of quantitative easing.

The Federal Reserve hasn’t actually been selling off bonds. It has simply allowed the proceeds from mature bonds to roll off instead of reinvesting them. According to CNBC, “The maximum roll-off is $50 billion a month, though it is rarely if ever reached — December saw about a $34 billion reduction in the Treasurys and mortgage-backed securities that are involved in the program.”

The Fed has reportedly shrunk its balance sheet by about $400 billion. That sounds like a lot until you put it in the context of $4.5 trillion. The markets have not responded well even to this modest tightening. As CNBC put it, “While Fed officials initially thought the balance sheet reduction could be done with little disturbance to markets, that hasn’t been the case.”

Peter has been saying we can expect rates to go back to zero and another round of QE in the near future. A lot of naysayers dismissed Peter, saying the Fed wouldn’t do such a thing unless there was another extreme crisis. Of course, the stage is set for another extreme crisis. But even if that doesn’t immediately come to pass, it looks like the Fed may well be pretty quick to pull the QE tool out of the toolbox.

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Peter Schiff

Mr. Schiff began his investment career as a financial consultant with Shearson Lehman Brothers, after having earned a degree in finance and accounting from U.C. Berkeley in 1987. A financial professional for more than twenty years, he joined Euro Pacific in 1996 and served as its President until December 2010, when he became CEO. An expert on money, economic theory, and international investing, he is a highly sought after speaker at conferences and symposia around the world. He served as an economic advisor to the 2008 Ron Paul presidential campaign and ran unsuccessfully for the U.S. Senate in Connecticut in 2010.