As discussed on FT Alphaville at length, quantitative easing is easy to start, but, what actually determines its success will be the execution of an exit strategy - something much harder to manage.
On that front, it seems the Fed is already divided. Comments Wednesday from Thomas Hoenig, president of the Federal Reserve Bank of Kansas City revealed as much. As Bloomberg reported, Hoenig believes:
The Fed’s actions “are not without risk,” Hoenig said. “As we go forward, one of the great challenges for the Federal Reserve, the central bank, will be how we withdraw ourselves” from the liquidity that’s been provided to the markets. “If you withdraw too quickly, you will cut off the recovery,” he said. “But if you wait too long, you will then provide the seed, if you will, for the next series of inflation, perhaps excess, and crisis. So it’s a very delicate balance between those two things and it’s dependent upon judgment.”
He went on to say:
The Fed must now manage its balance sheet in a manner that not only places liquidity in the economy but also in a manner that does not undermine the long term functioning of markets…[We] must design an exit strategy that at the appropriate time removes excess liquidity from the economy and allows [us] to withdraw as a significant intermediary… With the stimulus that is in place and if the economy does in fact pick up toward the end of the year, I think we will have [price] pressures up because policy is very accomodative at this time.
According to Monument Securities, this not only provides evidence that there is an increasingly large rift between the opinions of the Washington-based governors and the regional Fed presidents, but that the latter is considerably more ‘hawkish’. Monument’s view is actually even more hawkish still - as they explain (our emphasis):
Hoenig noted that if the Fed does not remove liquidity in 4-5 years, there will be serious problems ahead - we would say that if the “liquidity” is not withdrawn (to a large extent) in a much shorter period of time, then the possibility of a strong burst of inflationary pressures appears inevitable. One can also argue that the comments suggest the Fed is being rather economical with the truth about its outlook for the US economy, as sustaining the liquidity injection for such a period infers that the Fed sees the economy down on its knees for a similar period of time.
Meanwhile, they say, any talk that the US is in a better economic position than other countries to cope with the strategy should be dismissed:
The view that he expressed about the US being in a better position to deal with long term debt issues than other countries looks to be a bad case of American hubris. To be sure they may be in a better positions than Japan, Italy or the UK, but is that is their baseline for comparison, then it is a very low one, and the likes of Germany and Canada, even Brazil have a much more solid claim to such a half-cocked boast.
Of course, there’s always another opinion. In full support of the Fed’s rampage into QE and its potential inflationary consequences is Dennis Gartman of the Gartman Letter. His view (our emphasis):
We’ll take inflation and economic growth over deflation and depression anytime and anywhere. If we must watch the monetary aggregates go skyward in order to avoid turning a deep recession into a massive long standing and debilitating depression, then so be it. This is not Zimbabwe; this is not the Weimar Republic. This is 21st century American and we must needs remember that at all times.
We’re not so sure that’s necessarily a good defence.
Related links:
Escaping quantitative easing - FT Alphaville
(Fed)ing the masses - FT Alphaville
