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How Is Quantitative Easing Going to Get People Borrowing?


You can lead a horse to water, but you can't make it drink. The Fed can give money to banks to lend, but they can't make consumers or companies borrow it.


Long road to ruin there in your eyes
Under the cold streetlights
No tomorrow, no dead end in sight

-- Foo Fighters, "Long Road to Ruin"

A lot of people have already weighed in on the Fed's latest course of action, QE3. I'm going to throw my two cents in as well, because I don't think some things are being taken into account with respect to monetary policy that need to be. Honestly, I didn't want to have to write this, but given the nature of the discussion taking place, there are some things that need to be considered, even though we should already know how this story goes. It's all there in those Foo Fighters lyrics and in the title of that song.

Here's the key snippet from the Fed's announcement where they do their level best to take the Foo Fighters' lyrics and apply it to monetary policy:

The Committee will closely monitor incoming information on economic and financial developments in coming months. If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability. In determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases.

To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens. In particular, the Committee also decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015.

Based on that statement, it's obvious the money and bond markets will be subjected to QE beatings until morale improves. Time horizons and exit strategies be damned. How will the Fed know when they've done their job and won't need to do more? They're using the old definition applied to pornography: They'll know it when they see it. It's ironic -- and hilarious -- that for all the Fed's models and their data-intensive approach to understanding the economy, they're going to eyeball the success of this program. What strange times we live in.
No positions in stocks mentioned.
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