Futures Outlook - An Excerpt from CRB'S Futures Market Service
Fed was already in an aggressive “quantitative easing” mode even before latest $800 billion facility
The Federal Reserve has been in an aggressive quantitative easing mode right from the start of the credit crisis in mid-September with the bankruptcy of Lehman Brothers. “Quantitative easing” occurs when the Fed ignores interest rate targeting and instead targets quantitative money supply measures such as the monetary base. The monetary base, which is comprised mainly of bank reserves, is the basic “stuff” of bank lending since banks must hold reserves against the loans they extend to customers. When the Fed shoves reserves or money into the financial system regardless of the interest rate, the Fed is engaging in quantitative easing.
As the chart above indicates, the Fed has engaged in the most aggressive easing move in post-war history with the growth in the monetary base suddenly jumping to +82% yr/yr in the latest reporting week. The Fed has expanded its balance sheet by some $1.6 trillion so far. The latest liquidity injection was the Fed’s announcement on Nov 25 of a $600 billion fund to buy mortgages securities and a $200 billion fund to buy asset-backed securities backed by student loans, auto loans, credit card receivables, and small business loans.
Fed Chairman Bernanke, back when he was a Fed governor, discussed quantitative easing in speech on January 3, 2004 entitled “Conducting monetary policy at very low short-term interest rates” (available at www.federalreserve.gov). The gist of his argument is that quantitative easing can be effective instimulating the economy even with rates near zero. Mr. Bernanke in his speech said that a central bank does not have to cut rates to zero before employing quantitative easing. In fact, he noted some disadvantages of a zero interest rate such as fostering the idea that the central bank has “run out of ammunition” or that monetary policy has become ineffective, which is not the case if the bank is engaging in quantitative easing. Based on this line of thinking, the Fed at present may feel that it can get the job done on stimulating the economy with the funds rate at 0.50% as well as it could if the funds rate were at zero. That suggests that the Fed may not see a big benefit in cutting the funds rate to zero and may stop at 0.50% to avoid the perception that the Fed has become powerless.
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