QE – Part 2?

Treasury Yields fell from 2.74% to 2.67% yesterday, primarily due to comments from Jan Hatzius, chief economist of Goldman Sachs. Hatzius expects that the Fed will buy $1 trillion  of Treasuries to stimulate the economy. The comment had the opposite effect of key data released yesterday–slightly improvements in retail sales (0.4% monthly increase*, and 3.6% yoy*), and business sales (0.7% increase to $1.376 trillion). The improving data hints toward improving economy, or at least a relatively stable economy.

It’s definitely not a roaring business scenario, as flattening of business activity by NY Fed Empire State Manufacturing Survey asserts, or a mere 0.2% increase in industrial outputreleased by Fed. But, it’s not the gloom-and-doom scenario being predicted by many.

Even keeping aside the fact that economy is holding up (even though, just barely), it doesn’t look like we have a supply-side problem. Total money supply has increased every year for the last 3 years, but there’s little growth in demand. The short-term rates are already near the bottom, and Fed hardly has much firepower left. I think the problem of demand cannot be solved by tweaks in monetary policy–fiscal policy has to be the key behind recovery. Clearly Hatzius thinks differently, and I would like to have a peek into his brain.

* it is useful to note that the error margin for this statistic is 0.5%, which is larger than the statistic itself.


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