Weekly Economic Commentary 11/6/14

QE Ended, Now What?Economic image 11314

The Federal Reserve’s (Fed) policymaking arm, the Federal Open Market Committee (FOMC) met last week (October 27 – 31, 2014) and decided, as was widely expected, to end its bond purchase program known as quantitative easing, or QE. While the FOMC retained its promise to keep rates low for a “considerable time” after QE ends, it set the bar fairly high for restarting another round of QE. At the end of this week’s commentary, we’ll present some metrics to help answer the question many are asking in the wake of last week’s announcement: Did QE work? Our view is that it is probably too soon make the final call as to whether QE “worked,” and we’ll leave it to the economic historians, pundits, and politicians to debate that in the years and decades to come. One thing we know for sure is that no one can ever know what would have happened to the United States and global economies had the Fed (and other central banks) not embarked on QE during the uncertainty generated by the collapse of Lehman Brothers and its aftermath in late 2008 and early 2009.

QE Is Still Needed in Japan and the Eurozone QE was also in the news in Japan last week, as that nation’s central bank, the Bank of Japan (BOJ), ramped up its QE program, surprising markets, which had mostly expected the BOJ to wait until early 2015 to dial up its QE program. Late this week, November 3 – 7, 2014, the Eurozone’s central bank, the European Central Bank (ECB), will hold its monthly policy meeting. We continue to expect the Eurozone to expand its QE program, but in our view, that expansion is not likely to be announced this week. Although the results of the bank stress tests conducted by the ECB (which will take over this week, for the first time, as the bank regulator across the Eurozone) were released last week, the ECB is likely to wait to see some progress on the fiscal front (i.e., more government spending and tax cuts to help support the Eurozone economy) before it proceeds with the expansion of its QE program. We acknowledge, however, that the earlier than expected action from the BOJ to expand QE puts additional pressure on the ECB to do more — and sooner rather than later. As we noted in our recent (September 25, 2014) Weekly Economic Commentary, “Central Bankapalooza”:…..

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