Fed Must up Quantitative Easing Tomorrow
Posted by Michael A. Kamperman on April 28, 2009
Tomorrow the Federal Reserve will report on the results of their meeting. Market expectations are the Fed will stand pat. The Fed has been way behind the curve since their August 2007 meeting. The only reason they have been given a pass is they have been way ahead of the brain-dead European Central Bank and almost every other central bank in the world. But winning a race run against cripples is no reason to celebrate. The Fed needs to step into the big leagues and show real leadership. The Fed should have cut interest rates by 250 basis points in August of 2007, instead they held pat. Tomorrow is no time to stand pat. The Fed needs to announce an additional $2 trillion in quantitative easing (printing money) focused on U.S. Treasury bonds with maturities of 2 to 10 years. This will provide the type of shock and awe the economy, not the stock and bond markets, needs.
Goldman Sachs estimates $1 to $1.6 trillion in quantitative easing is the equivalent of a 1% cut in the Fed Funds rate. Is there any doubt the Fed Funds rate needs to be cut further? Other than the fact it is already near zero there should be no doubt much more stimulus is needed for the Main Street economy. The unemployment rate will soon surpass the worst case estimate for 2009 the Treasury is using as part of its stress tests of the banks. Surely if unemployment surpasses the Treasury’s worst case estimates the need for the Fed to ease should be undisputed.
The so called “green shoots” being touted include the latest news on nationwide home prices. While these prices fell in February the rate of decline is beginning to slow. I don’t know about you but I do not count a slowing rate of decline a sign of improvement when home prices in cities like Phoenix have now officially fallen more than 50%. The TARP is not restoring lending and the stimulus plan is a band aid on a wound that needs surgery. Lending from the shadow banking system remains all but non-existent. The time has come for Ben Bernanke and the rest of the Fed to stand up and be counted.
