Is Quantitative Easing (QE) akin to a magnetic suspension on a high end car? Magnetic suspensions benefit from the selective application of a magnetic field to iron particles suspended in hydraulic oil. Different settings impact the viscosity of the oil and resulting stiffness or softness of the suspension. Quantitative easing involves the purchase of government bonds and other assets by the government. Different purchase programs impact the real (inflation adjusted) interest rate and associated demand and consumption. Bumpy roads conquered?
There are suggestions that the QE control algorithm may receive an update which will result in a change in asset purchases and eventually interest rates.
Traders and investors would do well to consider the potential impacts, to their holdings, of the next version of QE (QE1, QE2, Operation Twist, QE3...). Let's briefly look at three possible scenarios: no change, bumpier ride, and smoother ride using six indicators. The Federal Reserve and the ECB set interest rates and auto sales and unemployment are a proxy for demand and consumption. The time periods used in the three scenarios are completely subjective:
No Change (2012 historic average annual data):
- Fed rate: 0.3%
- ECB rate: 0.0%
- Auto sales, US: 14.5 million
- Auto sales, EU: 12.9 million
- Unemployment, US: 8.1%
- Unemployment, EU: 9.1%
- Fed rate: 1.9%
- ECB rate: 2.9%
- Auto sales, US: 13.4 million
- Auto sales, EU: 13.5 million
- Unemployment, US: 5.8%
- Unemployment, EU: 6.0%
- Fed rate: 4.9%
- ECB rate: 2.0%
- Auto sales, US: 16.6 million
- Auto sales, EU: 14.8 million
- Unemployment, US: 4.6%
- Unemployment, EU: 7.1%
- Dizard, J. (2013, May 17). Fed hints at financial Heimlich manoeuvres. The Financial Times, online. Retrieved from www.ft.com
- Bureau of Labor Standards (US) Statistics. Retrieved from http://data.bls.gov/timeseries/LNS14000000
- ECB Data. Retrieved from http://www.ecb.int/stats/monetary/rates/html/index.en.html
- Eurostat Data. Retrieved from http://epp.eurostat.ec.europa.eu/statistics_explained/index.php/Unemployment_statistics
- Federal Reserve Data. Retrieved from http://www.federalreserve.gov/monetarypolicy/openmarket.htm#2008
- Henry, J. (2012, Dec 30). US Auto sales, profits are up for 2012. Forbes, online. Retrieved from http://www.forbes.com/sites/jimhenry/2012/12/31/u-s-auto-sales-profits-are-up-for-2012/
- Krebs, M. (2008, Jan 4). US Auto sales, profits are up for 2012. Edmunds Auto Observer, online. Retrieved from http://www.edmunds.com/autoobserver-archive/2008/01/2007-a-historic-year-for-us-vehicle-sales.html
- Krueger, V. (2012, Oct). Global Light Vehicle Overview. LMC Automotive for Standard and Poors. Retrieved from http://www.standardandpoors.com/spf/upload/Ratings_EMEA/Auto_London_2012.pdf
- Mackintosh, J. (2013, April 30). The first signs of the bears giving up. The Financial Times, online. Retrieved from www.ft.com
- Mackenzie, M. (2013, May 17). Those partying with easy money of QE will suffer the hangover. The Financial Times, online. Retrieved from www.ft.com
- Reynard, S. (2012, May 17). Assessing potential inflation consequences of QE after financial crises. Peterson Institute for International Economics, online. Retrieved from http://www.iie.com/publications/wp/wp12-22.pdf
- Stein, J.C. (2013, Feb 7). Overheating in credit markets, origins, measurements, and policy responses. Board of Governors of the Federal Reserve System, online. Retrieved from http://www.federalreserve.gov/newsevents/speech/stein20130207a.htm
- Unattributed. (2013, Feb 14). What QE means for the world, positive sum currency wars. The Economist, online. Retrieved from http://www.economist.com/blogs/freeexchange/2013/02/what-qe-means-world
- Zumbrum, J., et.al (2013, May 1). Fed seen slowing stimulus with QE cut by end of this year. Bloomberg News, online. Retrieved from http://www.bloomberg.com/news/2013-05-01/fed-seen-slowing-stimulus-with-qe-cut-by-end-of-this-year.html
