Do investors risk monetary easing, inflation and Operation Twist?
*The Economist, June 9, 2012:
''Yet hopes that 2012 would be the year when America's economy at
last shook off its lethargy seem dashed. Employers and investors
face increasing uncertainty in every big economy. China, India
and Brazil have slowed sharply. The euro zone is dangerously
close to collapse. Goldman Sachs reckons that the spillover of
European stress into American financial markets will knock 0.2 to 0.4
percentage points off growth this year.
Meanwhile, tax increases and spending cuts equal to 5% of GDP a year
are programmed to take effect around December 31st. Most analysts
assumed this 'fiscal cliff' would not be a worry until 2013. But
economists at Bank of America, in a recent report, think it could
become a significant drag relatively soon. The fiscal hit is
huge, the date is set, and no resolution is in sight before the
election on November 6th . This all gives firms a powerful
incentive to postpone hiring and investment until the resolution is
known. The bank sees a one-in-three chance of recession between
now and mid-2013.
In the past week both Bill Clinton and Larry Summers, Mr Obama's former
principal economic adviser, have urged early action to avoid the
cliff. Without such action, the only source of support is the
Federal Reserve. When the economy faltered in 2010 and 2011 it
responded, first, with a second round of bond purchases paid for by
creating money ('quantitative easing' or QE), then by buying long-term
bonds in exchange for short-term ones, a move called 'Operation
Twist.' Buying bonds pushed their prices up and yields
down. The Fed has also promised to keep interest rates near zero
at least through 2014. And, until recently, it was not inclined
to do any more than that. However, the present weakness in
employment, the growing risks coming from Europe, and the fiscal cliff
all suggest the Fed will give serious thought to easing monetary policy
at its meeting on June 19th and 20th. Janet Yellen, the Fed's
vice-chairman, said on June 6th that although she still expects a
gradual decline in unemployment and stable inflation, there are
'significant downside risks to the economic outlook, and hence it may
well be appropriate to insure against adverse shocks.'
How the Fed might ease again remains unclear. It could promise to
maintain interest rates near zero beyond 2014, its current
commitment. Ms Yellen, however, suggested that that would have
only a limited effect. Several officials favour more QE, the
Fed's most powerful tool, though some fret about potential side
effects, such as rising commodity prices and a political
backlash. The Fed could extend Operation Twist: the stash of
one-to-three-year bonds it could trade for longer-term issues has
dwindled, but it still has plenty of three-to-six-year paper. On
the other hand, Macroeconomic Advisers, a consultancy, warns that
selling such bonds could put upward pressure on consumer loan rates.
Then there is the question of what more bond-buying would achieve.
Long-term Treasury yields are already down to 1.7%, near the lowest
ever recorded. Yet while its tool-kit may be less powerful, at least
the Fed seems able and willing to use it.''
*This information is solely a highlight of the opinion of a third-party publication and is incomplete. Please subscribe to this publication for the full and timely opinion of the author and call a Monex Account Representative for any additional up-to-date information. This is not an offer to buy or sell precious metals. Investors should obtain advice based on their own individual circumstances and understand the risk before making any investment decision.
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