Can we expect further cuts in FED’s QE program? I think NO. $45 billion per month is exactly what the government needs to finance the budget deficit. Up to now the most reliable factor for prognosing the QEs was the need of US federal government of money. So with planned $560 billion deficit, Obama needs exactly about $45 billion monthly. So my prognosis is we saw the last QE cut for this year and may be for a longer period of time.
In fact there is another technology of financing the government with printed money. It is by making this through commercial banks. FED lends them at almost 0% interest rate and they are buying bonds at 2-3%. This is the most profitable bank business of past years, it is one of the forming factors of big bankers bonuses. Easy money. Anyway, the government is not obliged to continue doing so. It is better the debt to be bought directly by FED so some of expenses to go in FED, and then in a form of “profit” to be returned back to Treasury. I.e. the government de facto is paying no interest.
It is logical to assume that with blocked Congress and under high pressure for spending cuts, lowering interest payments is a gift Obama cannot refuse. So if Fed do really stops the QEs, this will mean about 2-3% interest on newly borrowed debt to be lost for government. 3% on $560 billion is $17 billion. Why should Obama give this money to banks or to private investors abroad that are still holding some US debt? In fact the expense will be even higher as with lowering the money print the interests will go up.
This system of financing the budget is called seigniorage. It is a guaranteed way to inflation and to robbing the money of real hard working people. Seigniorage is profitable for the governmnet and not profitable for society.
It is interesting to see how FED withdrew some stimulus in a moment of very weak economic growth. It is only 0,1%. This crushes the ideological thesis that QEs are motivated by the need of stimulating economy. Obviously this is a lie. FED is simply frightened by the enormous money print that was done and by its unbelievable balance sheet. So they are trying to limit the escalation of this foolishness to the lowest possible level. And economy has nothing to do with this. Only White House has…