Monday, March 5, 2012

Fisher rejects the need for QE3

In a recent speech in Dallas, the Dallas Fed President Fisher (non-voter) made some comments on the Fed’s monetary policy. He said that he is "personally perplexed" by the markets’ "continued preoccupation" with "so-called QE3." Unless the "patient" (the US economy) goes into "postoperative decline," he sees no reason for additional monetary easing.

Fisher’s view is that large asset purchase programs "injected money into the system," but that "most of that money has accumulated on the sidelines" in the form of excess reserves with the Fed.

US banks excess reserves

The negative view of QE3 is in agreement with other more hawkish FOMC members who don’t believe such a program's benefits justify the potential risks. The chart below is a good example of how relatively ineffective QE has been in increasing the broad money supply. M3 was already recovering when QE2 began, and it's unclear just how much of an impact asset purchases had on broader liquidity.

Source: Capital Economics (* M3 is their calculation, not the Fed)

Fisher also referred to the FOMC forecast for exceptionally low rates through 2014 as "not to be used externally, but also harmful if swallowed" (a quote from the 1966 FOMC forecast).
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