Friday, February 25, 2011

The Clueless Fed Branch Presidents, on QE2

The most important thing you need to know about QE2 right now is that most of the money the Fed is printing is not ending up in the economy, but as excess reserves back at the Fed.

Yet, Fed branch presidents, of all people, babble on as though they aren't even aware of this fact.

WSJ reports on Fed prez Bullard:
St. Louis Federal Reserve President James Bullard said Thursday that he supports adjusting the Fed’s current bond-buying program, dubbed as QE2, depending on developments in the U.S. economy.

Bullard said the Fed could send small signals that the economy is doing better by adjusting the program. He said there are many ways to adjust QE2, including stretching out purchases to the third quarter by buying at a slower pace. He was responding to questions from reporters after speaking at an event in Bowling Green, Ky.
WSJ reports on Fed prez Hoening:
Federal Reserve Bank of Kansas City President Thomas Hoenig on Wednesday said the U.S. central bank was risking a new financial crisis with its easy-money policies...

Hoenig, one of the Fed’s most outspoken internal critics, warned monetary policy should be tailored “so you don’t overshoot and cause the next crisis.”
WSJ reports on Fed prez Plosser:
One of the Federal Reserve‘s leading hawks warned Wednesday of the risks of maintaining easy monetary policy in the face of rising commodity prices and said if the recovery continues to pick up speed, he’d support curtailing the bond-buying program widely known as QE2.

“Should economic prospects continue to strengthen, I would not rule out changing the policy stance to bring QE2 to an early close,” Federal Reserve Bank of Philadelphia President Charles Plosser said. “If the growth rates of employment and output begin to accelerate or if inflation or inflation expectations begin to rise, then it may be time to begin taking our foot off the accelerator,” he said.

The central banker was referring to the Fed’s effort to buy $600 billion in longer-dated Treasury bonds by the summer in a bid to stimulate growth, bring down unemployment and push inflation away from deflationary levels
Remarkably, all the Fed branch presidents quoted above discuss the current situation as though Fed Treasury bond buying is actually putting money in the system. The money was going into the system before the New Year, but it has stopped since then. Excess reserves since the first of the year have climbed by $117 billion, while money supply growth (M2) has dropped to an annualized rate of 4.1% ,versus earlier growth of 7.0%.

The Fed shouldn't be manipulating the money supply at all, but these bronco rides will end up crashing the stock market and economy all over again. Think stagflation.


  1. When the Fed performs these so called "Quantative Easings" where does the money go specifically?

    All we generally hear is that the banks hold them as reserves but what banks are we talking about and are they simply getting this money for free or is it a low interest loan?

    And thanks for an absolute wonderful site. I discovered the site just as I was thinking that Rothbard had left an very important vacuum in terms of an Austrian class analysis of the events of our day. This has been restored with your website and of course LewRockwell also provides useful information. You almost feel compelled to pay for it. :)

  2. While I wouldn't want the Fed to do anything other than go away, I wonder what the deal is here. The Fed pays interest on reserves, so banks are at least partially compensated for not lending the money out. Is the whole purpose here merely to give the banks time to gradually get bad debt off their books? Is the theory that if we tough it out for a few years, then things might actually be okay? You know, what if the Fed decided tomorrow to start charging for excess reserves as opposed to rewarding banks, I think you'd see some lending then, pretty fast ...

  3. A lot of the money is getting into the economy, the deficit is not coverable with tax revenue plus borrowing. QE or default.