“To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee will continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month”, read the minutes of the Federal Open Market Committee that met on January 29-30.
This means that Quantitative Easing measures are safe for now, but reading further, we could see that more of eyebrows have been raised by the committee members. Before that, a backdrop cast:
The US Federal Reserve has been purchasing MBS or Mortgage Backed Securities to the tune of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month for quite a while, known as multi-stage QE measures. This has been done to improve the growth scenario and thereby boost employment in the economy. (The Fed, as per many analysts, has already spent at least a trillion, if not more to boost the economy since the advent of the Great Recession in 2008.)
The current scheme of QE, though open-ended is tethered to recovery in job market. As of December, the US unemployment rate is hovering at 7.8% way above the widely assumed Fed target of 6.5%. But economic indicators in US charting an upward trajectory have prompted the dissent in the FOMC when it comes to QE measures.
“A number of participants stated that an ongoing evaluation of the efficacy, costs, and risks of asset purchases might well lead the Committee to taper or end its purchases before it judged that a substantial improvement in the outlook for the labor market had occurred. Several others argued that the potential costs of reducing or ending asset purchases too soon were also significant, or that asset purchases should continue until a substantial improvement in the labor market outlook had occurred.” the latest minutes said.
This gives a mixed outlook. Nonetheless we can see a clear orientation towards ending of QE measures gaining strength.
“We can see a dissenting voice in the minutes, but no consensus emerging amongst the members to end QE measures.” said V.K.Vijayakumar, Investment Strategist with Geojit BNP Paribas, India. He believes that QE will not be ended abruptly as it may have adverse effects on economic growth, employment, and price stability. “When it comes to QE, I expect a slow reversal going forward.” he said.
The commodities rally have a liquidity supply in QE measures, but the same may not be in store for perpetuity.
Take for example the case of crude oil.
“With growth in developed markets slowing down there has been no fundamentals supporting the price rally. Yet the deluge of liquidity buoyed the crude oil prices up.” Vijayakumar said.
And yes, taking into account the economic perspective, he has been bearish on gold for some time.
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