/perspectives/global-cio-outlook/qe-from-35,000-feet

QE from 35,000 Feet

Quantitative easing has benefited from global macro events and appears likely to continue for the rest of the year. Markets, though, will continue to anticipate how the current policies will eventually be unwound.

May 21, 2013    |    By Scott Minerd

Global CIO Commentary by Scott Minerd

A stronger dollar and lower commodities means input prices are down, giving the Fed leeway to continue #QE.

ScottMinerd

“A number of macro trends have proven fortuitous for the Federal Reserve’s implementation of quantitative easing (QE). The European financial crisis and recession, as well as the depreciation of the yen, have driven global investors to dollar-denominated assets as a safe haven. The relatively strong dollar has kept input prices down, giving the Fed greater leeway to be extremely accommodative in tackling the unemployment problem without stoking inflation.

As evidenced in today’s congressional Joint Economic Committee hearing, the Fed is facing increasing scrutiny over potential exit strategies for its asset purchase program and has been making an effort to communicate clearly with the markets to avoid surprises. One of the more attractive options for the Fed appears to be to let its portfolio wind down over an extended period, instead of selling assets. If the Fed takes this route, it could increase bank reserve requirements to opportunistically restrict money growth, or engage in reverse repurchase agreements to drain liquidity out of the system as needed.”

Selling Not Required

If the Fed continues its current pace of asset purchases through the rest of 2013, the total amount of assets on its balance sheet will reach approximately 24% of GDP by the end of the year. When the Fed changes its monetary policy, it can do so by either selling its current assets or simply letting the bonds mature by holding them to maturity. If the Fed holds its bonds to maturity, its total assets to GDP ratio could fall to below 10% by 2023.

FED’S BALANCE SHEET ASSETS AS PERCENT OF GDP PROJECTION*

FED’S BALANCE SHEET ASSETS AS PERCENT OF GDP PROJECTION

Source: Federal Reserve Bank of New York, Bloomberg, Guggenheim Investments. *Note: We assume the nominal GDP will grow at an average rate of 5% per year. We also assume the Fed will continue its current asset purchase pace throughout the end of this year but stop purchasing with no asset sales starting next year. Only maturing principals will be absorbed. Interest income will be retained for operating and money supply purposes.

Economic Data Releases

Mixed Data and Low Inflation Leave Room for Continued Quantitative Easing

  • Industrial production fell by 0.5% in April, the most in five months.
  • Housing starts dropped 16.5% in April to a five-month low of 853,000 at an annualized rate.
  • Building permits jumped 14.3% in April to a annualized rate of 1.017 million, the most since June 2008.
  • The NAHB homebuilder confidence index rose to 44 in May, the first improvement in five months.
  • Initial jobless claims for the week ended May 11th rose to a six-week high of 360,000.
  • The University of Michigan consumer confidence index jumped to 86.7 in May, the highest since July 2007.
  • The leading indicator index had the best one-month gain in over a year in April, rising 0.6%.
  • Regional Fed indices disappointed, with the Empire, Philadelphia, and Chicago indices all unexpectedly falling.
  • CPI inflation fell to 1.1% in April, the lowest since 2010.

Eurozone Recession Reaches Record Length, Signs of Abenomics Impact in Japan

  • GDP in the eurozone contracted for a record sixth straight quarter, falling 0.2% in the first quarter.
  • German GDP rose a less-than-expected 0.1%, while France saw a second consecutive quarter of contraction, and Italian GDP shrank for a seventh quarter.
  • The eurozone CPI fell 0.1% in April, putting the year-over-year CPI at 1.2%, a more than three-year low.
  • Home prices in the U.K. increased 2.1% in May to a record high.
  • U.K. consumer prices rose less than forecast in March, putting the CPI up 2.4% from a year earlier.
  • Japan’s GDP grew at a better-than-expected 3.5% annualized rate in the first quarter.
  • Japanese industrial production rose for a fourth straight month in March, the best streak since 2011.

FEATURED PERSPECTIVES

July 17, 2018

No One Wins a Trade War

If you want to see who the real victims of tariffs are, go look in the mirror.

May 16, 2018

Positioned for Choppier Waters

After several quarters of low volatility, tight spreads, and abundant liquidity, financial conditions are shifting.

May 09, 2018

Forecasting the Next Recession: Updating Our Outlook for Recession Timing

New developments in fiscal policy, the labor market, and the neutral interest rate suggest that the expansion could extend into the latter half of our recession range.


VIDEO

Forecasting the Next Recession 

Forecating the Next Recession

Global CIO Scott Minerd and Head of Macroeconomic and Investment Research Brian Smedley provide context and commentary to complement our recent publication, “Forecasting the Next Recession.”

Macro Themes to Watch in 2018 

Macro Themes to Watch in 2018

In his market outlook, Global CIO Scott Minerd discusses the challenges of managing in a market melt up and highlights several charts from his recent piece, “10 Macro Themes to Watch in 2018.”







Read a prospectus and summary prospectus (if available) carefully before investing. It contains the investment objective, risks charges, expenses and the other information, which should be considered carefully before investing. To obtain a prospectus and summary prospectus (if available) click here or call 800.820.0888.

Investing involves risk, including the possible loss of principal.

Guggenheim Investments represents the investment management businesses of Guggenheim Partners, LLC ("Guggenheim"), which includes Security Investors, LLC ("SI"), Guggenheim Funds Investment Advisors, LLC, ("GFIA") and Guggenheim Partners Investment Management ("GPIM") the investment advisers to the referenced funds. Securities offered through Guggenheim Funds Distributors, LLC, an affiliate of Guggenheim, SI, GFIA and GPIM.

© Guggenheim Investments. All rights reserved.

Research our firm with FINRA Broker Check.

• Not FDIC Insured • No Bank Guarantee • May Lose Value

This website is directed to and intended for use by citizens or residents of the United States of America only. The material provided on this website is not intended as a recommendation or as investment advice of any kind, including in connection with rollovers, transfers, and distributions. Such material is not provided in a fiduciary capacity, may not be relied upon for or in connection with the making of investment decisions, and does not constitute a solicitation of an offer to buy or sell securities. All content has been provided for informational or educational purposes only and is not intended to be and should not be construed as legal or tax advice and/or a legal opinion. Always consult a financial, tax and/or legal professional regarding your specific situation. Investing involves risk, including the possible loss of principal.