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Don’t bet on more money-printing to save the market – at least, not yet
America’s QE programme is coming to an end – for now. John Stepek looks at the future for the markets, and what might force the Federal Reserve back into action.
Friday saw markets rally a bit at the end of a grim week.
James Bullard, head of the St Louis Federal Reserve bank, suggested that the Fed should keep printing money via quantitative easing (QE),rather than stopping in October.
Maybe keep going until Christmas. Just to be on the safe side.
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It's like the reforming alcoholic reaching for the quarter bottle of supermarket vodka stashed in the cistern. One last hit. Just to take the edge off.
So are we heading back to QE-fuelled gains and business as usual?
Don't bet on it.
The end of QE, for the time being
Another Fed mouthpiece and one who has been all for QE in the past said that the Fed should stop QE as planned at the end of October, unless "something dramatic happens". Boston Fed boss Eric Rosengren reckons the US economy looks healthy enough to take it. "Just because we're seeing volatility in the last two weeks isn't enough to have me fundamentally change my forecasts."
And he's right. If the Fed wants to launch QE4, they have to justify it somehow. They can't do it just because the market falls by 20%. And they can't do it just because Europe refuses to do it. There has to be some sort of risk to the US economy. And at the moment, that's not clear.
There's got to come a point where QE starts to have a negative impact. Nothing will rattle confidence more than the Fed deciding to depart from the plan when there's no reason to.
Investors might have a Pavlovian response at first just buying more stuff. But the smarter ones might start to wonder "is this ever going to end? And what does the Fed know that we don't?" Also, if you're still doing QE, and a real emergency comes along, what do you do then?
As I always say, predicting these things is a mug's game. But it's part of my job to be a professional mug (I was thinking of getting that put on my business cards). So here goes.
I still reckon that UK interest rates will stay put until after the election. They might go up shortly after that, but I suspect a lot depends on the outcome.
As for the Fed, I think it'll stick with the plan. A lot of people hate the current US government (which means it's hard to find anything like neutral commentary on the country's circumstances), but whether they like it or not, if you look at the bald economic data, the US economy seems to be recovering.
Employment figures are improving a great deal, and even the government finances look a lot better than those of most other developed economies. Yes, that's really not saying very much, but this is one of those areas where being better-looking than your rivals is more important than the absolute levels of debt.
So there's no excuse to keep the US plugged into financial life support. On top of that, the Fed will take comfort from the fact that there's no real pressure to raise rates right away, particularly with oil prices still plunging (which will hopefully continue).
That gives them an escape route and a safety valve. If things look like turning down, they just need to say a few choice comforting words to push market expectations for interest rate rises out further into the future.
Here's what could trigger another bout of QE from America
I'm not saying for a moment that QE4 is out of the question. But I don't see it happening yet. For QE4 to happen for the Fed to be able to justify it we'd need to get some sort of blow-up that threatened the financial system yet again. A deflationary black hole opening up somewhere on the planet that threatened to destroy banking sector profits as we know them.
As it happens, there's a very obvious trigger point for that Europe. If European Central Bank boss Mario Draghi can't drag the Germans over the red line marked euro QE', then Europe could be in real trouble. I'm guessing the threat of the eurozone splintering would give Janet and chums all the excuse they needed to flood the system with more printed money.
Until then, get used to ups and downs and market jitters. Business as usual, in other words.
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