Helicopter Ben remains unafraid to press print
THE question of whether we will see another round of quantitative easing (QE) from the US is one that is constantly being asked, especially after bad data, such as yesterday’s surprising ISM-Chicago manufacturing figures for April – showing the weakest growth rate in 29 months. Another massive pump of cheap cash into the US economy would send the markets haywire, as was the case with the last two rounds easing. The sensitivity of the market to every word that Ben Bernanke utters is testament to the power that the Federal Reserve chairman has to move markets.
Nobody wants to miss out on the opportunity to ride the wave when Bernanke pumps in the cash, spiking equities and knocking the legs out from under the dollar. Just take a look at last week’s press conference. Despite some ambiguous wording that commentators were quick to jump on, the recent Federal Open Market Committee (FOMC) announcement made no change to interest rates and gave no strong statement that another round of QE was on the cards. The statement by arch monetary interventionist Ben Bernanke that the Fed was “prepared to do more” was up there with the Pope voicing an affinity with the teachings of Saint Peter. As has been the case for the last three meetings, there was one dissenter from the unified message, with Richmond Fed president Jeffrey Lacker stating that he believes that the first increase in rates should come before the scheduled 2014.
QE3 has been off the cards of late, with less shaky jobs figures and core inflation holding to the two per cent level. At the same time, lending is on the up, signaling more robust liquidity in the financial sector. However, just because the Fed has not made out and out affirmations of its intentions to pump more cash into the economy, does not mean that the possibility has gone away. So what would trigger a helicopter drop of freshly minted dollars? Liz Ann Sonders, Charles Schwab’s chief investment strategist, points to the possibility of an end-of-2012 cliff for US macro data – Bush-era tax cuts are set to expire, automatic spending cuts are set to be triggered and the existing Operation Twist and QE programmes will be wound down. “Cuts to stimulus alone, even with an extension of tax cuts, will be a drag on the US economy in the short term,” says Sonders. “The effect of this is estimated to be in the vicinity of 3 per cent of GDP by many economists.” Furthermore, if the European sovereign debt crisis threatens to spread to the US banking sector and drag on economic growth, the Fed may respond with further stimulus measures, perhaps mirroring the move made in December last year when the Federal Reserve, the European Central Bank, Bank of England, Swiss National Bank and the Bank of Canada all intervened to lower US dollar liquidity swap rates by 50 basis points.
QE3 may not be set to be rolled out in the immediate future, but traders should pay close attention to the deterioration in US macroeconomic data for signs that the Fed is about to turn on the printing presses again.