QE: The Fed Struggles to End, ECB Struggles to Start

October 30th, 2014
in Op Ed

Fed Prepares to Pull the Plug

by Ben Ridgeway, Saxo Capital Markets

Editor's Note: This was written before the Fed meeting this week.

The fireworks may come early this week as investors look ahead to the Federal Open Market Committee (FOMC) meeting on October 29th. The central bank is expected to announce a final $15 billion reduction of its stimulus programme as it seeks to phase out QE3 at the end of the month. However, recent comments from members of the committee suggest the Fed could be rethinking its exit strategy and a surprise announcement may be on the cards.

Follow up:

Fed doves speak out

Speaking to Bloomberg Television on Wednesday October 22nd, St. Louis Federal Reserve Bank president, James Bullard, commented that an end to the quantitative easing programme across the US may need to be delayed at the next FOMC meeting. This, he said, applied most prominently in the bond purchasing space. It may be felt that a continuation of money supply from the central bank would help to increase inflation rate in the US towards the 2% target set by the Federal Reserve. Bullard may not be the only key figure in the US with similarly dovish views. Federal Reserve Bank of Minneapolis president, Narayana Kocherlakota, spooked the market a touch when he recently stated that interest rate hike at any point in 2015 would be a bad idea.

The weak inflation outlook in the US could give policymakers room for manoeuvre should the Fed decide to change tack. Latest consumer price index figures released on October 22nd showed inflation up a mere 0.1% in September, largely due to a fall in energy prices. The strength of USD has not helped either. EUR has fallen against USD from a high of 1.1350 on September 3rd to trade as low as 1.2516 exactly one month later. Minutes from the last FOMC meeting released on October 8th showed just how worried the committee is about the sudden strength of the US dollar. They warned that "a persistent shortfall of economic growth and inflation in the euro area could lead to a further appreciation of the dollar and have adverse effects on the US external sector". More warnings from Fed policymakers of such aggression regarding the greenback could be reiterated by members of the FOMC in the coming days.

Fears regarding the propensity for growth in China is also on the FOMC's radar. The potential for the US to default on loans provided to it by the People's Bank of China appears to be a worrying undertone to the current situation on the Fed's hands. Recently, investors have woken up to renewed global economic fears, and quickly realised that the woods are far thicker and darker than they may have presumed. The unemployment situation in the US could be regarded as a success story for the Federal Reserve, but there's an increasing feeling that there is no need to rush to recovery and that may well be reflected in the FOMC's statement on October 29th.

Latest inflation data from the Eurozone shows month-on-month consumer price index fell to 0.3% in September. In contrast, US consumer prices was reported at 1.7% during the same month.

ECB's QE ambitions curtailed

While the Fed looks hesitant to end its QE programme, the European Central Bank is struggling to get its new programme off the ground. On Monday October 20th, the European Central Bank began buying what would amount to approximately €1.5 billion worth of covered bonds by the end of the week in a number of regions across the continent. The full details regarding the exact amount spent on bond purchases will be released at the beginning of each week, but information regarding the success of both the implementation of the programme itself and the results of it on the deflation situation will take a little longer to become evident. The Bundesbank president Jens Weidmann is the most notable sceptic regarding the scheme to purchase asset backed securities and covered bonds, repeatedly suggesting that the problems in the Eurozone cannot be solved by the ECB, but rather by the member states themselves.

Neither the US nor the Eurozone can see the light at the end of the tunnel regarding quantitative easing. It is likely to be the Europeans, however, who will endure a harsher winter.

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