As the end of the second round of quantitative easing approaches, one analyst tells CNBC that even though the Fed’s purchase of $600 billion worth of bonds is nearing its conclusion, the period of easy money still has some way to go.
“Think of it as the equivalent of an interest rate cut. The period of easing will only end when that cut is reversed –and for the Fed it will only be “ended” when it seeks to reduce its balance sheet and unwinds its purchases” Chris Tinker, the founder of Libra Investment Services, told CNBC.
“This is not on the agenda. For the markets and for interest rates, however, it is about the stock of the Fed’s holdings of Treasuries– not the ongoing pace of purchase that matters – a point made by Ben Bernanke in his recent speech” said Tinker
For those investors who do not understand this point Tinker asks whether there view is being skewed by the speculative impact of QE2.
“Perhaps part of the problem lies with the idea – widely held it has to be said – that the impact of QE is a speculative one – that there is a mechanism that leads to a flow of Fed “printed money” into speculative commodities and that this will cease by the end of June and burst a bubble with it,” he said.
This view is wrong, according to Tinker.
“The effect of QE2 is to increase the monetary base and any talk of failure of QEII is really to address the limited effect of the multiplier.
“The policy approach may have its problems, but monetary ease will not end in June and indicators like the Financial Stress index should serve as a reminder that the current level of distress in the US financial system is very limited indeed,” Tinker said.