Many comments can be heard on Fed’s QE3 policy, but there is one principle that obviously always is followed – the size of the QE is about the size of the federal budget deficit. It is a fact that due to sequester and to battle in Congress there was achieved a decrease in the negative result of government balance sheet. So – in answer now Fed lowers the QE.
Officially you will hear different arguments – inflation target, unemployment, economy reviving or going down, etc. But in fact the only constant although – not officially recognized reason for QEs is the budget deficit. For 2014 Obama planned a deficit of $650 billion. And at the moment QE3 is at a level of $55 billion per month. I.e. $660 billion per year. In 2012 the deficit was $1080 billion and the QE was $85 billion per month – i.e. $1020 billion per year.
So to predict the QE you don’t need to hear Bernanke or Yellen, neither analyze the unemployment and the condition of the economy. You just need to follow the deficit prognosis and the debate on the Capitol. So at the moment as the QE closely matches the deficit, it is logical to assume this will be the QE3 level for 2014. May be some minor changes are possible. For 2015 about $560 billion deficit is planned. That corresponds to a QE of about $45 billion per month. So we can expect with closing the start of the next budget year Fed to announce a new cut of $10 billion of QE.
It is obvious the US government securities have become a junk investment with the Central bank becoming their major buyer. It cannot be otherwise as keeping low interest rates by using the money print press is a classic technology of chasing investors. When inflation is expected investors expect higher interests. But using the same money that worry investors to keep the interests low simply means there will remain no investors. So the only buyer will have to prepare the corresponding sum to buy all, or almost all newly created government debt. I.e. QE=deficit.
The real economy is already out of game as a motive for the monetary policy. In fact monetary policy is out of touch with real economy. They are living different lives, with the only consequence that the dollar emission is confusing the economic signals and making the business more risky. But no other connection. Employment and GDP are just excuses adjusted to the levels needed to guarantee the relevant level of QE. The real determinant of the size of QE is the budget deficit.
April 2nd 2014