QE from 35,000 Feet

Quantitative easing has benefited from global macro events and appears likely to continue for the rest of the year. Markets, though, will continue to anticipate how the current policies will eventually be unwound.

May 22, 2013   |    By Scott Minerd

Global CIO Commentary by Scott Minerd

A stronger dollar and lower commodities means input prices are down, giving the Fed leeway to continue #QE.

ScottMinerd

“A number of macro trends have proven fortuitous for the Federal Reserve’s implementation of quantitative easing (QE). The European financial crisis and recession, as well as the depreciation of the yen, have driven global investors to dollar-denominated assets as a safe haven. The relatively strong dollar has kept input prices down, giving the Fed greater leeway to be extremely accommodative in tackling the unemployment problem without stoking inflation.

As evidenced in today’s congressional Joint Economic Committee hearing, the Fed is facing increasing scrutiny over potential exit strategies for its asset purchase program and has been making an effort to communicate clearly with the markets to avoid surprises. One of the more attractive options for the Fed appears to be to let its portfolio wind down over an extended period, instead of selling assets. If the Fed takes this route, it could increase bank reserve requirements to opportunistically restrict money growth, or engage in reverse repurchase agreements to drain liquidity out of the system as needed.”

Selling Not Required

If the Fed continues its current pace of asset purchases through the rest of 2013, the total amount of assets on its balance sheet will reach approximately 24% of GDP by the end of the year. When the Fed changes its monetary policy, it can do so by either selling its current assets or simply letting the bonds mature by holding them to maturity. If the Fed holds its bonds to maturity, its total assets to GDP ratio could fall to below 10% by 2023.

FED’S BALANCE SHEET ASSETS AS PERCENT OF GDP PROJECTION*

FED’S BALANCE SHEET ASSETS AS PERCENT OF GDP PROJECTION

Source: Federal Reserve Bank of New York, Bloomberg, Guggenheim Investments. *Note: We assume the nominal GDP will grow at an average rate of 5% per year. We also assume the Fed will continue its current asset purchase pace throughout the end of this year but stop purchasing with no asset sales starting next year. Only maturing principals will be absorbed. Interest income will be retained for operating and money supply purposes.

Economic Data Releases

Mixed Data and Low Inflation Leave Room for Continued Quantitative Easing

Eurozone Recession Reaches Record Length, Signs of Abenomics Impact in Japan

Important Notices and Disclosures

This article is distributed for informational purposes only and should not be considered as investing advice or a recommendation of any particular security, strategy or investment product. This article contains opinions of the author but not necessarily those of Guggenheim Partners or its subsidiaries. The author’s opinions are subject to change without notice. Forward looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Guggenheim Partners, LLC. ©2014, Guggenheim Partners. Past performance is not indicative of future results. There is neither representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information.



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