Comment: Fed Out of Bullets?

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Fed Out of Bullets?

The biggest policy action the Fed has been taking in recent years has been QUANTITATIVE EASING (QE). I am sure that many here at the Daily Paul see QE as inflationary, but I think not. In financial market jargon, QE is nothing more than an asset swap. The Fed gives currency reserves in exchange for Treasury notes and bonds. Those currency reserves do not circulate in the economy but rather find their way back to the Fed as EXCESS RESERVES earning a mere 0.25% as an over night deposit. In fact, if anything QE is deflationary because interest income on Treasury debt that would otherwise have been earned by commercial banks instead is paid to the Fed which subsequently remitted back to the Treasury.

I like to think of QE as much ado about little. Even a 2004 Fed research paper authored by none other than Bernanke himself along with co-authors Sack and Reinhardt, "Monetary Policy Alternatives at the Zero Bound: An Empirical Assessment", casts doubt on the effectiveness of QE when interest rates are at the zero bound

http://www.federalreserve.gov/pubs/feds/2004/200448/200448pa...

Basically Fed ran out of monetary bullets when they drove rates to 0%, but they needed to “do something” to at least appear to be relevant not to mention to justify the cost of keeping all those PhD’s on the payroll. This explains in part why the economic recovery has been so tepid despite unprecedented fiscal spending, (maybe because of it?). It’s the Japanese scenario all over again and let's not forget that Japan pioneered the practice of QUANTITATIVE EASING and look what it what it got them.... two lost decades and deflation.

If the Fed had any meaningful monetary bullets in their gun holster, WHY would they not have already used them? In my opinion Fed QE is nothing more than the Fed doing a rain dance.

Ed Rombach