Opening and Closing the Monetary Faucets

Cue the critics. QE is getting a rethink – to the distress of some of the world’s markets. As reported by the Financial Times’ Dan McCrum, “One of Wall Street’s biggest money managers has called the Federal Reserve to rein in its programme of quantitative easing, calling the bond-buying tactics a ‘large and dull hammer’ that has distorted markets and risks stoking inflation.”

Rick Rieder, who oversees $763bn in fixed income investments for BlackRock spoke out as the Fed debates how long to keep up the unorthodox measures it has used to stimulate the US economy. His comments add BlackRock to the growing list of Fed critics who warn of trouble ahead for the bond market.

As the Financial Times’ John Farchy wrote, hedge fund ubermanager John Paulson “argues that the move by the US Federal Reserve and other central banks to engage in quantitative easing, or ‘money printing,’ will ultimate[ly] lead to runaway inflation and the debasement of paper currencies such as the dollar.”

Edward Pinto, resident fellow at the American Enterprise Institute, has written: “Over the past year, the Federal Reserve has ramped up its policy of quantitative easing, with the result being new stock market highs and surging bond prices. Moreover, housing prices jumped 8%, the biggest annual gain since 2006.” Pinto added: “Recent data released by the Federal Housing Agency (FHFA) suggest that the increase in house prices is not being driven by a broad-based improvement in the economy’s fundamentals. Instead, the Fed’s lower rates are simply being capitalized into higher home prices. This does not bode well for the future.”

But not everyone, especially not all central bankers, have gotten the message. In addition to Israel, “Central banks in Australia, South Korea, Poland, India, and Hungary have pushed their benchmark borrowing rates lower in the past few weeks,” wrote the Wall Street Journal’s Jessica Mead and Jon Hilsenrath.

Meanwhile, Fed Governor Ben Bernanke shook the markets by indicating that he might be slowing the flow from the faucet -- telling a congressional committee that in ‘the next few meetings” of the Fed, it could change its policies.

The markets prefer floods to droughts. But consider the mighty Mississippi. Last year, too little water between its banks. This year, too much. Be careful what you wish for.