The latest study by the Federal Reserve Bank of San Francisco (FRBSF) draws unexpected conclusions that almost make you believe a disgruntled Fed employee did it. But be assured, it’s an official study published on the FRBSF website.
The study analyzes and quantifies the effect of large-scale asset purchases (LSAPs), also known as quantitative easing (QE) and lower interest rates, on the economy and inflation.
The results are uncharacteristically frank and seemingly self-defeating, but the intent of this study may just be brilliant (more below).
The study is about 5 pages long and can be summarized roughly by a few paragraphs.
The final conclusion is that: “Asset purchase programs like QE2 appear to have, at best, moderate effects on economic growth and inflation.”
How moderate? “A program like QE2 stimulates GDP growth only about half as much as a 0.25 percentage point interest rate cut.”
How much does a 0.25% rate cut boost the economy? “GDP growth increases about 0.26 percentage point and inflation rises about 0.04 percentage point.”
In other words: “QE2 added about 0.13 percentage point to real GDP growth in late 2010 and 0.03 percentage point to inflation.” (see chart)
Furthermore, the study states that: “Forward guidance (referring to the low interest rate policy) is essential for quantitative easing to be effective.”
In other words, QE only works in conjunction with a low interest rate policy. The federal funds rate, the rate banks charge each other to borrow money deposited at the Fed, is already near zero. The 10-year Treasury yield (Chicago Options: ^TNX) is just coming off an all-time low.
It is no longer possible to ‘supercharge’ QE with ZIRP.
A Brilliant Move?
A few days ago, the Federal Reserve came out with a report stating that leveraged ETFs may sink the market. View related article about leveraged ETFs at fault for market crash here.
Now the Fed is basically saying that QE didn’t do squat. The converse logic of the Fed’s report is that QE is not to blame should stocks tank (after all, if QE didn’t drive up stocks, tapering can’t sink stocks). The Fed is basically saying 'if stocks tank it's not because we spiked stocks and are now taking the punchbowl away.'
This is ironic, because even the Geico caveman knows that various QEs buoyed the S&P 500 (SNP: ^GSPC) and Dow Jones (DJI: ^DJI) to new all-time highs. Even economically sensitive sectors like consumer discretionary (NYSEArca: XLY) trade in never before seen spheres.
Did the Federal Reserve ever admit to manipulating the stock market higher?
Sometimes in cryptic terms without any direct admission of guilt, but there is one exception.
An official report by the Federal Reserve of New York actually puts a shocking number on how much above fair value the Fed's QE drove the S&P 500.
A detailed analysis of the report can be found here: New York Fed Research Reveals That FOMC Drove S&P XX% Above Fair Value
Simon Maierhofer is the publisher of the Profit Radar Report.
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