The muted reaction to further QE - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 15 December 2012
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- By Asad Dossani, Author, The Lucrative Derivative Report


Asad Dossani
This week, the US Federal Reserve announced further measures to stimulate the US economy. Much to everyone's surprise, they announced a new round of quantitative easing (QE), and this time tied their policy to meeting specific objectives on the unemployment rate. Put simply, the Fed will continue very loose monetary policy until unemployment falls substantially.

The most interesting thing about the market's reaction to the Fed was the lack of it. There were no significant movements in the dollar, no significant movements in precious metals, and no real move in the global stock markets as a result of the announcement.

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Why is this occurring? Over the last two years, even the prospect of further QE (let alone the actual announcement) was enough to propel stock markets and commodity markets higher, and the dollar lower. This time, no such thing happened. How can we explain why the market no longer seems to care about further QE?

The answer lies in the fact that we have a much better idea of what the result of further QE will be. Previously, we were worried about rampant inflation resulting, so gold would skyrocket. Despite the QE measures over the last two years, there has been no rise in inflation. Thus, the expectation of high inflation as a result of QE no longer seems to hold.

Second, the expectation that QE will improve the economy also no longer holds. Over the last two years, QE hasn't showed to have a significant positive impact on the economy. Thus, the market doesn't expect that the economy will benefit.

The conclusion we can come to is that because QE hasn't had significant economic impacts so far, the market no longer expects any major outcome from the Fed's latest round of bond buying. Of course, the market could be wrong. The US economy may end up with higher inflation or better growth as a result of QE, but currently no one is anticipating that.

is a financial analyst and columnist. He actively trades his own and others' funds, investing primarily in currency, commodity, and stock index derivative products. Prior to this, he worked at Deutsche Bank as an analyst in the FX derivatives team. He is a graduate of the London School of Economics. Asad is a keen observer of macroeconomic trends and their effects on global financial markets. He is deeply passionate about educating investors, and encouraging individuals to take part in and profit from financial markets. To put it colloquially, he wishes to take Wall Street products and turn them into Main Street profits!

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2 Responses to "The muted reaction to further QE"

C K Vaidya

Dec 16, 2012

Tme muted response may also be explained by the 'fiscal cliff' and US economy losing as much as 5% of its GDP in one short year if that happens.
All attention is focussed on the negotiations between politicians.

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sunilkumar tejwani

Dec 16, 2012

it is an open secret where all the money of QE goes. no marks for guessing. it has benefited only wall street sharks and commodity speculators.

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