Fed Ready for QE3?
The Fed is lining up QE3. At its last meeting, Bernanke admitted the economy was sluggish and the Fed was ready to act - just not now. So the markets went into their "Will he - Won't he" dance: up for a few days; down for a few.
Now one of the Fed Chiefs, Eric Rosengren, comes out strongly in favor of the Fed buying bonds "aggressively." So you have to think the pressure's building to act soon. So is this the sign the markets are looking for? If so, they're not showing it.
If some of this confuses you, who can blame you? These guys seem to keep switching the way they talk about goosing the economy. Sometimes they say they want to buy bonds, sometimes they're ready to "step in," or maybe they just say they "stand ready" to do, well, something. Rarely do they use the term "QE," hardly ever "QE3."
So to make things clearer, all these different phrases add up to QE3. And QE3 means the Fed continues to believe that it must "stimulate" the economy because the economy is not growing "fast enough."
I use the quotation marks because the jury is out on whether these measures will indeed stimulate the economy. To understand this, let's look at the word "stimulate."
When I think of the idea of the economy being stimulated in some way, I think of either a sleepy economy or a drunk economy. You know when you wake up and you're kind of half sleep-walking until that first cup of coffee? Or maybe you've had the experience of trying to revive a drunken friend out of his stupor by plying him with coffee while you throw cold water in his face - or something like that. So I guess the economy we've got now is like when we're half-asleep or drunk and need coffee. The Fed's going to supply the coffee.
The thing is, when we're half-asleep and drink coffee, that might wake us up. But isn't it up to us to then do something - you know, get ourselves going in the morning? The coffee doesn't groom and dress us and get us out the door, does it? We've got to use our will power and take action.
As for the drunk, the coffee's only going to shake them up a bit. It's not going to make them sober. Indeed, many is the drunk who kids himself into thinking he's fit to drive a car just because he downs a few cups of coffee. He's not sober, of course.
So the coffee just by itself won't do the trick. The economy has to show some will power and take action.
Now, the Fed knows that their cups of coffee (QE3) aren't the whole answer here. But they claim that with a few cups, the economy will get going on its own. So, if that were true, what happened the last few times they injected their caffeine into the economy? Sure the sleepy (or drunk) economy perked up a bit. But what then?
Right. It's hasn't really worked all that well so far. So what now?
Well, you have people who say that the Fed just hasn't used a strong enough brew, and hasn't brought enough of it to the sleepy economy. Just pump up that sleeping giant with more and stronger coffee.
I'll tell you what. This argument's been around ever since the Fed started trying this in the Great Depression. Even today, some people say they didn't pump enough and that's why the Depression became "Great."
What you have to ask yourself, though, is whether there's any real proof that gulping all that coffee really does work. Maybe the economy's in "week-end" mode - you know, where you have that morning cup and just decide to take it easy rather jump up and run around for the rest of the day. Is drinking a second cup of coffee going to make you start running around?
Now one of the Fed Chiefs, Eric Rosengren, comes out strongly in favor of the Fed buying bonds "aggressively." So you have to think the pressure's building to act soon. So is this the sign the markets are looking for? If so, they're not showing it.
If some of this confuses you, who can blame you? These guys seem to keep switching the way they talk about goosing the economy. Sometimes they say they want to buy bonds, sometimes they're ready to "step in," or maybe they just say they "stand ready" to do, well, something. Rarely do they use the term "QE," hardly ever "QE3."
So to make things clearer, all these different phrases add up to QE3. And QE3 means the Fed continues to believe that it must "stimulate" the economy because the economy is not growing "fast enough."
I use the quotation marks because the jury is out on whether these measures will indeed stimulate the economy. To understand this, let's look at the word "stimulate."
When I think of the idea of the economy being stimulated in some way, I think of either a sleepy economy or a drunk economy. You know when you wake up and you're kind of half sleep-walking until that first cup of coffee? Or maybe you've had the experience of trying to revive a drunken friend out of his stupor by plying him with coffee while you throw cold water in his face - or something like that. So I guess the economy we've got now is like when we're half-asleep or drunk and need coffee. The Fed's going to supply the coffee.
The thing is, when we're half-asleep and drink coffee, that might wake us up. But isn't it up to us to then do something - you know, get ourselves going in the morning? The coffee doesn't groom and dress us and get us out the door, does it? We've got to use our will power and take action.
As for the drunk, the coffee's only going to shake them up a bit. It's not going to make them sober. Indeed, many is the drunk who kids himself into thinking he's fit to drive a car just because he downs a few cups of coffee. He's not sober, of course.
So the coffee just by itself won't do the trick. The economy has to show some will power and take action.
Now, the Fed knows that their cups of coffee (QE3) aren't the whole answer here. But they claim that with a few cups, the economy will get going on its own. So, if that were true, what happened the last few times they injected their caffeine into the economy? Sure the sleepy (or drunk) economy perked up a bit. But what then?
Right. It's hasn't really worked all that well so far. So what now?
Well, you have people who say that the Fed just hasn't used a strong enough brew, and hasn't brought enough of it to the sleepy economy. Just pump up that sleeping giant with more and stronger coffee.
I'll tell you what. This argument's been around ever since the Fed started trying this in the Great Depression. Even today, some people say they didn't pump enough and that's why the Depression became "Great."
What you have to ask yourself, though, is whether there's any real proof that gulping all that coffee really does work. Maybe the economy's in "week-end" mode - you know, where you have that morning cup and just decide to take it easy rather jump up and run around for the rest of the day. Is drinking a second cup of coffee going to make you start running around?
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