Traverse City Record-Eagle

Business

January 5, 2014

Jason Tank: Death to QE

TRAVERSE CITY — My dad often paid me a compliment when I was younger.

Well, sort of.

My father saw little value in idle chit-chat, but he would offer praise by saying I do have “the gift of gab.”

I’ve grown to learn my so-called gift can bring mixed results. In a similar way, incoming Federal Reserve chairwoman Janet Yellen will likely learn a few lessons about the effectiveness of the Fed’s own gift of gab, known as forward guidance.

For over a half decade now the Fed has conducted an experiment. Following their initial success in providing loans to banks, the Fed dove headfirst into an untested policy of quantitative easing that plunged short-term interest rates to almost zero. This controversial policy, known as QE, is the subject of heated debate.

It is now undeniable the Fed wants out of QE. At their December meeting, the Fed blinked yet again — for the third time — by announcing its intention to gradually end QE. They plan to first slow, or taper, then stop purchasing government debt. It begs the question: why stop now with unemployment still too high and inflation still too low?

By the time they end QE, about $4.5 trillion of US government debt will be owned by the Federal Reserve. Like any bank, the Fed earns a spread: the difference in the rate it pays its depositors and the rate it earns on its investments. By holding short-term rates at near zero, almost all of the interest paid to the Fed by the US Treasury passes right on through to its single shareholder, the US Treasury itself. This provides pain-free budget relief by having the left pocket pay the right pocket about $100 billion a year. It’s a circle that comes with risk.

Text Only

the BIZ

AP Video
Judge Ponders Overturning Colo. Gay Marriage Ban Airlines Halt Travel to Israel Amid Violence NYPD Chief Calls for 'use of Force' Retraining VA Nominee McDonald Goes Before Congress Bush: Don't Worry, Sugarland Isn't Breaking Up US Official: Most Migrant Children to Be Removed Police Probing Brooklyn Bridge Flag Switch CDC Head Concerned About a Post-antibiotic Era Raw: First Lady Says `Drink Up' More Water Courts Conflicted Over Healthcare Law Holder Urges Bipartisanship on Immigration Raw: Truck, Train Crash Leads to Fireball US Airlines Cancel Israel Flights Obama Signs Workforce Training Law Crash Victims' Remains Reach Ukraine-held City Diplomatic Push Intensifies to End War in Gaza Cat Fans Lap Up Feline Film Festival Michigan Plant's Goal: Flower and Die Veteran Creates Job During High Unemployment
Hyperlocal Search
Premier Guide
Find a business

Walking Fingers
Maps, Menus, Store hours, Coupons, and more...
Premier Guide