Monday, 24 September 2012

Mike Lenhoff: Wall Street’s underlying ‘risk-on’ trend

Image: David Rumsey Historical Map Collection
Writing in last Friday’s Insight column of the Financial Times, Gillian Tett picked up on the Fed’s latest initiative on QE3 (Beware the costs and psychology of QE3) and on why several Fed Governors (and non-voting FOMC members) were less than supportive of it. She encouraged those wishing to celebrate the market action to read the speech given last week by Richard Fisher, head of the Dallas Fed and one such non-voting member – and I did.

In his talk, which was ‘bold’ and well worth the read, Fisher focused on uncertainty as the key in preventing monetary policy from being as effective as might be expected and thus questioned the merits of more stimulus if companies are not responding to the Fed’s policy initiatives already. To quote Fisher: ‘... you cannot have consumption and growth in final demand without income growth; you cannot grow income without job creation; you cannot create jobs unless those who have the capacity to hire people – private sector employers – go out and hire.’

If uncertainty inhibits what would otherwise be the response to easy monetary policy, what good can more QE do? Fisher cites evidence, which applies as much to medium-size and small businesses as to large companies, as indicating that monetary policy is not an issue and that even if interest rates could be cut, this would not induce firms to alter their investment intentions.

Moreover, the concerns are broadly shared across the corporate spectrum. As Fisher put it: ‘… With the disaster that [US] fiscal policy has become and with the uncertainty prevailing over the economic condition of both Europe and China…it is no small wonder that businesses are at sixes and sevens in committing to expansion of the kind…to propel job creation.’ More >
Mike Lenhoff
Chief Strategist

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