Economist Sees Fed QE Stimulus Returning, Stocks Rally

Economist Sees Fed QE Stimulus Returning, Stocks Rally

$DIA, $SPY, $QQQ, $VXX

Yale University Economics Professor and Nobel Laureate Robert Shiller warns that the United States could very well return to economic stimulus in the form of QE (quantitative easing) if the current stagnation continues.

The US Fed’s carefully scripted decision to raise interest rates last December, and begin a return to “Normal” policy, may now become a nightmare for the US central bank if an economic downturn forces a return to “unconventional” methods.

Fed Chairwoman Janet Yellen told lawmakers on The Hill she was studying ways to “be prepared” in the event the current slide in world stock markets, concern about financial sector stress, and slowing economic growth all translate into a recession or another financial crisis.

A return to QE, or bond buying to counter another recession faces doubts. The initial round of QE is thought to have helped battle the financial crisis when it was launched in December 2008, but even sympathetic policymakers now question how much impact 2 subsequent rounds of bond buying had on jobs, investment and economic growth in the US.

Professor Shiller thinks QE-4 is in the wings, but not yet a certainty.

“If things get bad, yes. They are not on the track right now, but that is the tool that is widely admired and I think that if it does get bad, they will certainly go back,” he said.

Professor Shiller does not think the US is headed to another Y 2008 like crisis.

“First of all, the 2008 crisis was bad. So, it would be foolish to predict something that bad again. We do see some improvements. For example, banks have higher capital now. On the other hand, it does have a risk of becoming a crisis. But it is hard to predict these things,” he said.

He also does not think world central banks like the US Fed are totally to blame for all of the economic woes.

“I do not think they are primarily responsible. I think there is a tendency to exaggerate the importance of central banks when they are doing a good job. There was a weakness in the world economy and there was some effort to stimulate it,” he said.

“Now, it did have an exaggerated impact on financial markets. Maybe they should have been more concerned about that but I do not think I would pin most of the blame on them. I think we cannot expect them to control everything perfectly,” he said.

Some economic experts feel the Fed will have to make some tough decisions to boost economic growth.

With short term US interest rates still so near Zero, the standard monetary policy tool of lowering rates is also unlikely to work.

Other options, such as the direct lending programs used during the Y 2008 crisis, may stretch the Fed’s legal authority.

It is still too early for the Fed to declare defeat.

The Fed’s next monetary policy meeting will be held on 15-16  March when policymakers issue fresh economic forecasts and Ms. Yellen holds a press conference.

Thursday, the US major stock market indexes finished at: DJIA +212.30 at 16696.95, NAS Comp +39.60 at 4582.14, S&P 500 +21.90 at 1951.62

Volume: Trade was lighter than the recent average with about 930-M/shares exchanged on the NYSE

• Russell 2000 -9.2% YTD
• NAS Comp -8.5% YTD
• S&P 500 -4.5% YTD
• DJIA -4.2% YTD

Stay tuned…

Paul Ebeling

HeffX-LTN

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