Last week the US Federal Reserve surprised yet again by announcing QE 4: a program through which it would purchase $45 billion of US Treasuries every month.
Between this program and the Fed’s QE 3 Program announced in September, the Fed will be monetizing $85 billion worth of assets every month ($40 billion worth of Treasuries and $45 billion worth of Mortgage Backed Securities) ad infinitum.
Indeed, the Fed’s new policies are anchored to its goal of getting employment down to 6.5%. This means the Fed will buy these assets non-stop until employment gets down to 6.5%.
I’ve spoken to a number of people in the financial community as well as outside investors and no one seem to grasp the significance of this announcement.
First and foremost, QE does not create jobs. The UK has announced QE efforts equal to an amount greater than 20% of its GDP and has not seen any meaningful job growth. Similarly, Japan has announced nine rounds of QE for a combined effort equal to 20% of its GDP over the last 20 years and job growth remains dismal there.
Based on this, the Fed’s decision to anchor its QE efforts to employment is a bit hard to swallow. Indeed, I would argue that the Fed’s moves have very little to do with employment and instead are meant to address the following.
- The US economy is nose-diving again and the Fed is acting preemptively.
- The Fed is trying to provide increased liquidity going into the fiscal cliff.
- The Fed is funding the US’s Government massive deficits.