Annaly Capital: The prosecution of QE2
There was some irony in the first week of November 2010, a week in which the Federal Reserve committed to another round of quantitative easing, this time $600 billion, and the Republicans took control of the House of Representatives and came very close to taking the Senate. The irony is that although the average person probably can’t tell you what QE2 is, let alone knows that it is about to happen, it will arguably have a far greater effect on them than the new leadership on Capitol Hill. We’ll talk much more about QE2 in the rest of this monthly commentary, from a number of different perspectives, but we begin with two contextual observations of the Federal Reserve’s decision. First, this is not an insignificant decision by Chairman Bernanke and the rest of the voting members of the FOMC. (Except for dissenting Kansas City Fed President Hoenig, who believed that “the risks of additional securities purchases outweighed the benefits.”) The prosecution of QE2 will be monitored and adjusted as necessary, but the implication is that the Fed has to be prepared to go bigger if the desired results are still not occurring. It is a slippery slope. Moreover, the monetary policymakers must believe that the probability of continued disinflation, further economic and jobs weakness is great enough to warrant this significant a step, a step without any true precedent or track record of either success or failure. Since the rational mind races to think of the potential downside and unintended consequences of QE2, the only explanation for it is that Bernanke & Co. see something truly dire on the horizon.