The Fed-Formula: Money + HOPE = Growth

The Fed’s recent announcement to pump 600 billion dollars into its financial system has been this week’s spectacular news. Economists around the world now started wondering whether this measurement will really help. In the end, it seems very obvious that the Fed has to imply a large dash of hope into its strategy….

Unsurprisingly, I found plenty reports about QE2 effectiveness being taken into question. For example, the article “The Federal Reserve’s second round of quantitative easing has brought joy to most financial markets”, by Kathleen Madigan of Dow Jones Newswires, questions whether QE2 will really solve the unemployment problem: “businesses are using their current workforces more efficiently…”, thus “productivity [was] up 2.5%”.

As another example, the report “QE2:Good or Bad?”, by Pete Davis of Wallstreetpit.com makes clear that the results can be those desired or the extreme opposite, as new liquidity “could easily end up being saved and invested overseas”. In the end, “a lot depends upon market and consumer perceptions…”.

I don’t think it will lead to results in the near future.

To me, the second round of quantitative easing has similarities to the first round. This is due to the fact that once again, there are no released studies about the reasons why the Fed chose this considerable amount of 600 billion dollars. Why not more or less? QE2 gives an impression of vague calculations added to a huge amount of hope that everything will work out as the Fed wishes.

Have you perhaps asked yourself the same? How did they come up with this amount for QE2? Do you think they will even raise this amount later on? I have such a feeling about it.

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5 Responses to The Fed-Formula: Money + HOPE = Growth

  1. stuerzele says:

    An article published by the Financial Times states that if the FED intends to inflate the economy, an amount of $600 bn might not be enough. On a website called “ActionForex” the FED is quoted that “Both the size and the pace of purchases will be subject to regularly review and adjusted in light of incoming economic data.” According to them, the FED decided on the 600bn due to economic data, I don’t think they will show the world the exact analysis which helped them to get to that amount.

  2. bravenewloock says:

    Stuerzele, so true, most likely they won’t show their calculation because it is based on a series of very speculative assumptions and raw data. Even within the FED, QE2 was a hotly discussed topic, as this statement by Philadelphia Fed President Charles Plosser shows: “Asset purchases in our current economic environment can do little if anything to speed up the return to full employment, because I see little gain at this point, and some costs, I would prefer not to engage in further asset purchases at this time.”

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