The Federal Reserve's policy setting panel wound down its two-day meeting today, holding steady with its current stimulus plan, and I can't help thinking about the old quip, "the beatings will continue until morale improves." But in this case the beatings are bond purchases, as Ben Bernanke and friends are going to keep delivering them — at $40 billion a month — whether they're working or not.
"We're QE3 skeptics," says Jeff Cleveland, senior economist at Payden & Rygel, in the attached video. "We fail to see the direct link, or even an indirect link, between the size of the Fed's balance sheet (how many bonds they have) and the unemployment rate."
While more than a few observers have taken note of the fact that the stock market's initial celebration of the open-ended stimulus plan (unveiled a month ago) is not only done and gone, but was extraordinarily short. While Cleveland is willing to overlook the short-term volatility of equities, he's less forgiving about the artificial impact QE3 is having on the supply and demand dynamics of the bond market.
"What [the Fed] is really doing, day to day, is removing liquid, and quite frankly, highly sought after securities from the bond market," he says. Cleveland acknowledges that the program clearly keeps rates down but argues that it has "very little" impact on unemployment.
Of course, only time will tell how long the Fed sticks with its bond-buying binge and what, if any, results that garners. From his point of view, Cleveland sees the Fed as "true believers" who are acting independently and could continue the program well into 2013 in hopes of achieving of their long-term goals.
"It's interesting to me that when the Chinese central bank buys treasuries, that's currency manipulation. When the Fed buys Treasuries, well, that's just good economic policy," he says.
In the meantime, the early results of QE3 in the bond market appear to be as inconclusive as those on the stock side of things, with the yield on the 10-year Treasury almost back to its pre-ease levels again and closing in on a five-month high.