Practical analysis for investment professionals
20 November 2013

Blurred Effect: Former St. Louis Fed CEO Poole on the Great Central Bank Unwind

Posted In: Economics

The following post was contributed by Alexander Silinskiy, lecturer and tutor in finance and economics at Swinburne University of Technology in Melbourne, Australia.

At her recent US Senate confirmation hearing, Federal Reserve Vice Chairwoman Janet Yellen, who seems poised to win the nod to succeed Ben Bernanke at the helm of the world’s most powerful central bank, pledged her support for the Fed’s massive bond-buying program designed to spur the economy and reduce unemployment. This so-called QE3 program has indeed had a stimulative effect — but not, says former St. Louis Fed president and CEO William Poole, in the way that most people think. The impact has largely been on expectations rather than a direct effect pushing up asset prices.

At the recent Australia Investment Conference in Melbourne, Poole cited as evidence the spread between 30-year, fixed-rate mortgages and 10-year US Treasury bonds. From 1976 to 2006, the spread was 1.74%, on average. From May 2011 to April 2012 it averaged 1.76%. In other words, the direct impact of quantitative easing on spreads has been extremely limited.

In fact, QE3 has not led to higher money growth, Poole said. Similarly, quantitative easing has resulted in only a very modest growth in bank credit. These two factors, above all else, explain why Fed asset purchases have had such a surprisingly limited direct effect.

Poole, a senior fellow at the Cato Institute and a distinguished scholar in residence at the University of Delaware, argued that the main drag on economic recovery has been inadequate growth in non-residential fixed investment. Reasons include regulatory burden, food-safety regulations, and the fiscal environment.

The other question that has been weighing on financial markets, of course, is the change in leadership at the helm of the Fed and how aggressive Vice Chairwoman Yellen would be, if confirmed to succeed Chairman Bernanke, in tapering and eventually ending the asset purchasing program — a question that is beginning to be answered as her confirmation moves forward.

In the video above, filmed last month in Melbourne, Poole takes the audience through his views on the “Great Central Bank Unwind.”

Alexander Silinskiy has passed all three levels of the CFA Program and may be awarded the charter upon completion of the required work experience.

Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.

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