Is QE3 Justified? Comparing Current Conditions With 2010
Sober Look | Sep 12, 2012 03:08AM ET
As the financial markets widely anticipate an aggressive easing action from the Fed (to be announced on 9/13), it is once again worth making a comparison between the conditions that lead to QE2 in 2010 and the current financial/economic conditions. The goal is to focus on the factors that central bank asset purchases can actually impact as opposed to those that the FOMC wishes to influence. Here they are:
1. Central bank balance sheet expansion can reduce financial stress in the system (similar to what happened in 2008). Here we compare the Westpac US Financial Stress Index as well as the VIX index for the the past couple of months with the same period in 2010. The current period basically has no financial stress at all (the more negative number for the stress index indicates lower stress).
2. Quantitative easing can also lower rates (both consumer and corporate) via fixed income asset purchases. The long-term Treasury rates are already negative when adjusted for inflation expectations (discussed here ).
Even if QE was justified in 2010 (some would argue it wasn't), additional monetary expansion certainly can not be justified in the current environment.
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