Monday, March 21, 2011

Was QE-2.0 Necessary?

QE-2.0 was explicitly aimed at boosting stock prices to create a positive wealth effect on the economy. I don’t think that was necessary given the great recovery in corporate earnings. While I love bull markets, I prefer organically grown ones rather than Fed-inflated bubbles. What’s done is done, and the Wilshire Index is up $6.9 trillion over the past two years, with $2.6 trillion of this gain occurring since August 27, 2010, when Fed Chairman Ben Bernanke first raised the possibility of a second round of quantitative easing. In my scenario, the wealth effect should continue to boost the economy this year.

QE-2.0 has weakened the dollar, which is boosting exports. Fed officials have denied that QE-2.0 was designed to weaken the dollar. However, the trade-weighted dollar is down 6.0% since the end of August 2010, when Mr. Bernanke first raised the possibility of QE-2.0.

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