© Stefan Schilbe
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In fact it is unlimited and coupled to fundamental aspects of the economy. The Fed has clearly said that the unemployment rate is too high and the policy makers are willing to purchase $40 billion worth of mortgage-backed securities to stimulate the economy, and to bring down financing conditions as long as unemployment rate has not come down substantially. However, they did not exactly pin down what this means – does this means an unemployment rate of 7% or 6%? I guess it is quite clear that they mean much lower unemployment rate. If you take this into account, this means that they have to buy for a very lengthy time frame. Thus, this is quite different from what the Fed did before, because they just bought for explicit time frame let's say for half a year in the past. This is a major difference to previous QE packages.
Do you see any big benefits from a new Fed's bond-buying programme?
Regarding financial markets, this is quite clear the programme leads to tendency of a weaker Dollar for the United States, and therefore a weak Dollar could be somewhat simulative to net export in the US.
Regarding financing conditions in the financial markets, I guess we are again back into a risk-on mode. I would expect that over the longer term financial markets continue appreciating, which means that stocks should rise and financing conditions for companies should improve somewhat. However, if this really leads to a stronger economy will depend on whether the banking industry is willing to lend again to households and companies, and if households and companies are willing to take that money to invest and spend. It is not yet sure.
What risks does the bond buying programme entail?
The biggest risk from the view of financial market participants certainly is that over the longer term this leads to inflation. If the Fed performs its package over let's say a couple of years and expand its balance sheet, this could certainly lead to some kind of inflation at that point where for example banks are really willing to lend strongly again and companies and households take the loans to invest and spend. In that situation with a higher degree of capacity utilization, this could lead to inflation if the Fed then does not stop the programme.
Such measures as quantitative easing tend to debase the value of the US Dollar. To your mind what is more beneficial for the US economy to have a strong or weak Dollar?
In my view, the policy makers have a clear interest to weaken the Dollar, because the Dollar has been fairly strong as a reaction to financial markets uncertainties over past couple of months. This was more of a flight to a quality in the way that the Dollar is the most liquid currency. People just use the US Dollar as a way to park their money in times of uncertainty. This directly leads to lower competitiveness in the United States. In a situation when the global trade comes down this is also a burden for the economy, when it comes to a contribution from exports. Thus, I guess that is a target of the United States to have a somewhat weaker Dollar to stimulate the exports.