QE2 May Imply Earlier Interest Rate Hike

by: Lok Sang Ho

All the signs suggest that QE2 is not really necessary. The PMI for Manufacturing has risen to 56.9 in October, up from 54.4 in September. The New Orders subindex jumped to 58.9 from 51.1. The non-manufacturing PMI also rose, though not as sharply, from 53.2 to 54.3, with New Orders rising from 54.9 to 56.7. And of course, the latest non-farm private sector job growth at 159,000 in October is a big jump.

Lest you think that these are one-month figures and thus just an aberration, the change in total nonfarm payroll employment for August was revised from -57,000 to -1,000, and the change for September was revised from -95,000 to -41,000. Since the number of government jobs shed was most probably correct in the first place, the upward revisions largely reflect a better than earlier reported private sector job growth.

My judgment that QE2 is not necessary is not based on these figures, but rather on recent developments in the foreign exchange market and in the financial markets. In an earlier article, I already predicted that with a weakened US dollar in recent months and a strong rebound in the stock market, effective monetary conditions would improve significantly. I am expecting a pick up in economic growth in the coming months. The above mentioned figures only affirmed my earlier analysis. From this perspective, the new round of quantitative easing will likely be proven unnecessary. By pushing the economy particularly hard now, it is quite likely that interest rates will have to be pushed up sooner, quite possibly by the end of next year.

Disclosure: No positions