Sy Harding: Quantitative Easing Will Continue

In fact, Harding believes the Fed will have no choice in the matter. Despite the stronger-that-expected jobs report last Friday, other recent data shows the U.S. recovery is on a shaky footing.

[Despite mounting signs of resurging inflation worldwide, which Harding goes into detail about,] there was no indication of an early end to the Fed’s stimulus efforts, or a move toward raising interest rates to ward off inflation. Fed chairman Bernanke said that unemployment is a bigger concern than the threat of rising inflation, and the Fed would stick with its efforts to spur the economy, adding, “Until we see a sustained period of stronger job creation we cannot consider the economic recovery to be truly established.”...

[T]he new expectation is that now the Fed will begin preparing markets for an early end to its QE2 quantitative easing, scheduled to end in June anyway, and for the beginning of interest rate hikes.

It’s not likely to happen, and here’s why.

Reports over the last several weeks show quite clearly that the U.S. economic recovery began stumbling again, and quite significantly, in January, and it continued in February and March.

There were totally unexpected huge plunges in both existing and new home sales, permits for future construction starts, further declines in home prices, and big increases in the inventory of unsold homes, and pending foreclosures. Away from the depressing housing industry, the reports have been of unexpected big declines in durable goods orders, in consumer confidence, construction spending, as well as slowing manufacturing growth as measured by the Chicago area PMI Index, and the national ISM Manufacturing Index....

He ends by suggesting that the recovery after Friday morning's spill is likely handicapping future monetary stimulus.


For his conclusion, Mr. Harding assumes that the Fed looks at the totality of economic data when making its decisions on whether or not to ease. If the Fed's statements are taken at face value, though, then the jobs report is the one they're going to use as the primary decision criterion. Thus, we may see the end of stimulus despite the drag the U.S. economy is currently going through.

As a reminder, I point out that they do believe in a "new normal" of subpar growth. Thus, they may interpret sagging indicators in other areas of the economy as merely part of that "new normal" - meaning, they don't see the need to counteract the softening.