QE3 Watch

QE3 Watch

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Zero Hedge – ETA To NEW QE: Don’t Hold Your Breath Just Yet
Whether one believes that Bernanke’s mandate mission in life is to ‘save the banking system’, ‘reflate asset prices’, ‘devalue the USD’ – all of which seem to err on the side of inflation (and ultimately hyper-inflation once the trust is gone); it seems more critical to focus on the other side of the coin – deflation. Bernanke’s true raison d’etre is simple: avoid debt deflation and implicitly everything he has said and studied points to the avoidance of any deflation. For this reason, BofA notes that today’s chart of the day is the Break-even inflation rate in the US. This has been the most consistent – non-numeraire-based – leading indicator of Fed QE efforts. We note that the initial QE2 decision took a little longer to enact but was signaled considerably earlier (Jackson Hole) as the break-evens dropped below its NEW QE threshold.

The Federal Reserve’s Budget

The New York Times – The Growing Fed
One part of the economy that’s growing rapidly is the Federal Reserve. These are boom times for the central bank, which persuaded Congress to expand its responsibilities significantly in the wake of the financial crisis. And with greater responsibility comes a larger budget. If not in every case, then at least in the case of the Fed, which as it happens sets its own budget. The Annual Report: Budget Review published Tuesday shows that the Fed plans to spend $4.7 billion this year, a 35 percent increase over 2006 after adjusting for inflation. Moreover, the Fed’s fee-based income from check processing and other services has been in steep decline, with the result that the net cost of operating the Fed actually has increased by 105 percent. The bill, in other words, has more than doubled since the financial crisis. And according to the Fed, the crisis is the cause. The central bank says that more effective regulation requires more regulators and better tools. (It’s important to note that these increased expenses are more than offset by the vast increase in revenues from the Fed’s investment portfolio, which allowed it to transfer $75.4 billion in profits to the Treasury Department last year. The expansion, however, still reduced the amount of those transfers, and it is likely to endure long after the Fed’s portfolio returns to more normal size.)

The Fiscal Cliff

CBO.gov – Economic Effects of Reducing the Fiscal Restraint That Is Scheduled to Occur in 2013
Policymakers are facing difficult trade-offs in formulating the nation’s fiscal policies. On the one hand, if the fiscal policies currently in place are continued in coming years, the revenues collected by the federal government will fall far short of federal spending, putting the budget on an unsustainable path. On the other hand, immediate spending cuts or tax increases would represent an added drag on the weak economic expansion. In fact, under current law, increases in taxes and, to a lesser extent, reductions in spending will reduce the federal budget deficit dramatically between 2012 and 2013—a development that some observers have referred to as a “fiscal cliff”—and will dampen economic growth in the short term. CBO has analyzed the economic effects of reducing that fiscal restraint. It finds that reducing or eliminating the fiscal restraint would boost economic growth in 2013, but that adopting such a policy without imposing comparable restraint in future years would have substantial economic costs over the longer run.

Source: Bianco Research