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Wednesday, September 25, 2013

The US Fed would continue with its QE Programe: So sit back and enjoy
 ~~Suman Mukhopadhyay
Cartoon, Courtesy: The Week
The US dollar is strong today, but it seems it is simply trying to factor in the HOAX, that the Fed will going to taper from October, 2013. Moreover, the inflation in the US is very low, so low that there are apprehensions, that the prices could crash if the US stimulus is withdrawn prematurely.

Also, too strong dollar is not good for the US economy, which has a large component of exports to the EU, Latin American Countries and Africa. In such a situation, the US will be happy to see a weak dollar and continue with bond buying (Central Bank buying US treasury securities from dealers or QE) programme. According to my analysis, the US Fed will continue make efforts to keep long term interest rates down.

BUY WHY WOULD THE US DO THAT?

The US Fed would continue with its QE program on the hope that it could create conditions where Businesses will invest more and people will spend more. It is no secret that the US is a primary engine of the world economy.

Now, buying longer term securities will make less government debt available to investors. This will raise the price. As Bond prices rise, their rates fall. Long -term securities affect rates on home mortgages and other loans. Lower rates on corporate bonds could lead business to invest in more equipments and create jobs. Lowering short-term interest rates is the Federate Reserves main way to get banks to increase lending. But those rates are already near Zero.

Fed Chairman Ben Bernanke wrote in The Washington Post: "Easier financial condition will promote, economic growth".

But as mentioned earlier interest rates are already low and hence, this raises the obvious question of the logic to continue with the QE3 for too long.

And though critics say further cuts in rates are unlikely, but pumping more money is going to debase USD further, which will help it in its exports and continue to push inflation to others' shores. The interest rates in the Europe and US are lower than in Asia and Latin America.

As a results, economies of these places are likely to see a continuous flow of investments. Large flow of USD to Asia, is likely to help India, as it is less export oriented. In order to trap this flow of capital in the debt market, the RBI government has already increased the Repo by 24 bps during the last policy meet. In other world the Indians will be one of the biggest beneficiaries, if the US continues with its quantitative easing programme.

[With inputs from various sources]