FOREX IN REVIEW

The FOMC decision last week and subsequent Bernanke comments saw markets soar on the announcements. Risk-assets globally rose as central banks have begun introducing stimulus in lock-step. It started with a $150 billion Chinese infrastructure package and Mario Draghi’s “unlimited” asset purchase plan. Growing pressure on Ben Bernanke to act emanating from government officials, investors, and economists resulted in the latest easing iteration.

Formally known as Quantitative Easing 3, this program differs substantially from earlier announced programs. First, there is no defined time limit, implying it is unlimited, like the ECB’s recently announced revamped bond purchase program. However, just like the ECB asset purchase program is limited in that there are not unlimited funds available to buy sovereign debt, there is not unlimited money for quantitative easing. As the close of “operation twist” approaches, this implies that the annual addition to the Fed balance sheet is $1 trillion.

The question which remains unanswered is will the new easing mechanisms spur growth in the American economy? There are two main camps of thought. The first camp believes that quantitative easing will assist the real economy by having funds trickle down from lowering the yield curve on longer dated assets to spur more long term investment by business. These gains from investment will again trickle down to average consumers as business investment rebounds and effects are felt in the real economy. Realistically, looking at prior performance, the opposite occurred. Businesses did not hire as expected while corporations hoarded cash and avoided investment.

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