Do We Need More QE?

by: Benzinga

St. Louis Federal Reserve President James Bullard is making some comments that are crossing the wires, and surprisingly, he is talking about the potential for more quantitative easing, despite the fact that Operation Twist has not even started yet.

The initial reaction to Operation Twist is mixed, with some on Wall Street questioning its effectiveness, as measured by asset prices. On the other hand, the Federal Reserve Bank of New York is expected to come out today with a paper talking about how it may actually be more powerful than some are giving it credit for being.

Bullard said that the economy is acting "sluggishly," but that he expects it pick up into 2012. We have seen a lot of mixed data on growth, with Chicago PMI and ISM recently coming in better than expected, but the equity markets are signaling a recession. The amount of confusion in this market is something that we have not seen for a long time, even during the panic of 2008.

He also made a comment that puzzled many, including some on Wall Street. He said that if the U.S. economy weakens further, the Fed would act, including with additional quantitative easing.

That comment about more QE is puzzling, since Operation Twist has not even gone into affect, although the market has obviously taken it into account and started acting. Bullard did say that the U.S. should be aware of the "Lost Decade" in Japan, which was fueled by easy monetary policy. Some fear we are going there now, although many on the Fed, including Chicago Fed President Charles Evans, believe we need additional easing.

In prepared remarks a few weeks ago, Evans said, “Given how truly badly we are doing in meeting our employment mandate, I argue that the Fed should seriously consider actions that would add very significant amounts of policy accommodation,” Evans said in his prepared speech. “Such further policy accommodation does increase the risk that inflation could rise temporarily above our long-term goal of 2 percent.”

To think we need more additional QE is almost insanity, since it has had mixed results at best. The purpose of it was to maximize employment, not raise the value of the Russell 2000. It has not lowered unemployment, but equities did well during the time of quantitative easing. Remember, the very definition of insanity is doing something over and over again, and expecting different results.

What do you think? Do we need more easing or is enough enough?


Traders who believe that more easing is inevitable might want to consider the following trades:

  • Consider commodity related names, like Potash (NYSE:POT), Mosaic (NYSE:MOS) and Agrium (NYSE:AGU).
  • Also consider tech names like Oracle (NASDAQ:ORCL), Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG), which benefit from a weaker dollar.

Traders who believe that quantitative easing is done may consider alternate positions:

  • Congress does not seem likely to act in a pro-growth manner, and the Fed may be done easing, so there is a strong chance we could go into a recession, or even worse. Consider shorting everything and anything if you believe nothing gets done to help the economy.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.