Bernanke’s faith in QE on shaky ground

Since the end of the International Monetary Fund meetings in Tokyo less than a week ago, there have been a series of defensive statements from Federal Reserve officials trumpeting the success of their actions. Ben Bernanke, head of the US central bank, said Fed policy “helps strengthen the US economic recovery” and “by boosting US spending and growth it has the effect of helping support the global economy as well”.

But there is little hard evidence of either a recovery in the broad economy or a connection between “quantitative easing” and any hopeful signs of improvement in the economy. The economic activity that was supposed to be sparked by the third round of quantitative easing has yet to materialise.
Indeed, the impact of this latest round of unconventional monetary policy is already fading. Analysts at Morgan Stanley this week decided that returns in the high-yield market were no longer attractive in the face of deteriorating fundamentals. The stock market is struggling to make further headway, while yields on mortgage-backed securities have started to turn up after an initial drop. A drop in third-quarter capital expenditure suggests the Fed policy hasn’t been a catalyst for corporate investment at all.
One major reason for the lack of effectiveness of this latest round of quantitative easing may well be a growing concern with the “fiscal cliff”, automatic US tax rises and spending cuts due to kick in on January 1. Uncertainty over “cliff risk” – and the prospects of a deal in Congress on deficit reduction – seems to be offsetting any positive impact of Fed policies.

Read more: http://www.ft.com/intl/cms/s/0/2b1b4d12-193f-11e2-af4e-00144feabdc0.html#axzz29RpQdaiI