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Bank of America Analysts Attack Fed's QE2

In a research report released yesterday, Bank of America Merrill Lynch expressed doubts about the ability of additional quantitative easing to further increase economic confidence.

While acknowledging that further declines in interest rates would aid mortgage refinanciability, most of the BofA/ML research report focuses on the costs associated with quantitative easing. The principal objection of BofA analyst seems to be associated with the risks of QE2 to ignite future credit bubbles.

The analysts go on to write: “In our assessment, further liquidity injection beyond some additional marginal transmission mechanism into mortgage refinancing or housing affordability would achieve little impact on the real economy.”

Perhaps the broader take away from the BofA/ML report is this:

Analysts at one of the largest financial institutions in America are not terribly sanguine about The Feds plan to begin another round of QE. That in itself should concern investors since, as the BofA report points out, “… [E]xpanding QE2 may end up doing more damage than good to the extent it leads to a reduction in confidence.”

In its own research report on further QE released yesterday, titled “The Myth and Mistake of Quantitative Easing,” First Trust economists Brian Wesbury and Robert Stein, CFA make the case against QE even more strongly:

Quatintative Easing does not boost real economic activity or inflation — it is not an injection of new money, like traditional monetary easing. Quantitative Easing is a wrong-headed approach to monetary policy that was born in the midst of a panic. It was only necessary because strict mark-to-market accounting rules made it difficult or impossible for private companies to hold risky assets. Now that these fair value accounting rules have been corrected, there is no further justification for QE.

More reactions to hints at a Fed policy shift are certain to follow in the days ahead: Policy makers and central bankers might hope they are greeted with more optimism than this.






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