The other "big story" of the week

Good morning, with the midterm election finally over, the other big story of the week is today’s likely announcement by the Federal Reserve that it will launch its second round of U.S. Treasury purchases, also called Quantitative Easing II. With QEII, the Fed will try to boost our weak economy by buying Treasuries and pushing yields lower across the curve (higher prices equal lower yields). That, in theory, should make it easier for companies to borrow money for things like new business projects, inventory purchase, etc. It should also encourage consumers to buy and refinance homes as rates will continue to be at historically low levels.

A decline in borrowing costs and interest rates should also, in theory, help the country transition from a jobless recovery to a recovery with lower unemployment. (Ironically, if the Fed succeeds in this attempt, new members of congress, elected on the idea of less government intervention, will likely credit the improving economy and drop in the unemployment rate to their own making and not to the Fed’s actions. But that’s another story…).

However, as Bill Gross, the “Bond King”, points out in his November Investment Outlook (link attached), no one really knows whether QEII will be effective or not in boosting economic growth. Furthermore,

“We at PIMCO…will tell you, as perhaps he (Bernanke) cannot, that the outcome is by no means certain. We are…in a “liquidity trap,” where interest rates or trillions in QEII asset purchases may not stimulate borrowing or lending because consumer demand is just not there…. Ben Bernanke, however, will try – it is, to be honest, all he can do. He can’t raise or lower taxes, he can’t direct a fiscal thrust of infrastructure spending, he can’t change our educational system, he can’t force the Chinese to revalue their currency – it is all he can do, and as he proceeds, the dual questions of “will it work” and “will it create a bond market bubble” will be answered. We at PIMCO are not sure.”

Click on the link below to read Bill Gross’ full piece.
http://www.pimco.com/Pages/RunTurkeyRun.aspx

Have a good rest of the week.

Rod