OUT OF AMMO

JP Morgan is joining me in acknowldging that policymakers appear to be out of ammo:

“Have policymakers run out of ammunition? Unless they become a lot more adventurous, the answer is probably yes, or at least almost, as monetary policy is already max stimulative and public finances are in a precarious condition.  Mr. Bernanke tried to allay market fear by assuring us the FOMC will do “all that it can” to assure recovery, but what is that exactly? He listed three potential added measures: more QE buying of USTs; assuring markets it will keep rates on hold for longer; and paying less interest on excess reserves. The first two ought to work through lowering bond yields. We see indeed a decent probability that the Fed will announce another $500 billion-$1 trillion of QE UST buying during the second half of September. With bond yields already at historic lows and credit demand weak, these measures are unlikely to have much impact on the economy.”

Yes, QE is in fact a non-event.  The Fed is out of bullets and Congress is gridlocked in a battle for their jobs.   The risk in such an environment is continued disinflation with a dollop of Japanese economic syndrome (higher risk of full blown deflation than high inflation):

“The risk is thus rising that the mature economies of Europe and North America are joining Japan into a decade of low growth and deflation. Bernanke said today that he did not consider this risk significant, but we suspect he was trying to allay fears, rather than trying to gauge probabilities. Deflation is not our base case, either, but we still consider it a serious risk that is worth hedging.”

Source: JP Morgan

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