Gold slipped back to the $1300 zone, weighed by a firmer dollar and a rebound in U.S. equities. The market is also awaiting the release of the minutes from the March 18-19 FOMC meeting, at 2:00ET today.
There is expected to broad unanimity reflected in the minutes, as the March meeting was the first presided over by new Fed chair Janet Yellen. However, while there was a consensus on policy, The Wall Street Journal’s Jon Hilsenrath points out that Fed officials are unclear on why they agreed on rate strategy. “[I]t is striking that on such an important issue the Fed doesn’t have a consistent explanation for why,” writes Hilsenrath.
An article in The Economist this week posits that central banks may now be financing governments on a permanent basis. Whoa, say whay? Financing governments? And this is economically liberal, Keynsian-leaning The Economist talking!
That’s not the basis for QE cited by the central banks! Price stability and full employment is the bill of goods we’ve been sold, but I suspect our readers have known all along that central banks’ policy has indeed allowed governments to deficit spend on a massive scale.
The Economist makes the point that QE “makes democratic leaders less accountable.” There is little incentive for those unaccountable leaders to make difficult fiscal changes when an unaccountable central bank is doing all the heavy lifting.
The elected officials can keep cranking out trillion (or near-trillion) dollar budgets, driving the national debt ever-higher, with little consequence. Heck, Congress even saw fit to suspended the debt ceiling for another year.
I believe The Economist is correct in asserting that “what was originally a temporary arrangement has been turned into something more permanent.” So even as the Fed minutes suggest that tapering will continue, look at QE in the broader global context. The ECB is contemplating a launch of its own QE program, and despite Kuroda’s protestations, the BoJ is still likely to expand its operation.
Even if you believe the Fed will wind QE3 down entirely, what’s it going to do with its $4 trillion+ balance sheet? What would such an unwinding look like, and what would be the affect on rates.
And what of that $17 trillion+ in debt, if rates are allowed to revert to the mean? It would be a complete and utter disaster and so the Fed will continue to sit on interest rates, perhaps allowing a little steam to escape from time to time, via the taper.
Easy money has certainly been the ‘new normal’ for many years already. It is likely that QE is part of that ‘new normal’ as well.