As we await Ben Bernanke’s first ever press conference this afternoon, the debate over whether the Federal Open Market Committee (FOMC) should extend unconventional measures rages on.
Behind the scenes powerful forces are locked in battle over whether to extend it or not according to one analyst.
“We believe that Wall Street is an enthusiastic supporter of additional unconventional monetary policy and would like to see the programme continued,” said Jeremy Batstone-Carr, an analyst at Charles Stanley Research in London said in a research note.
“At present the US Treasury is purchasing around $120 billion worth of Treasuries from Wall Street banks on a monthly basis. It is to be assumed that Wall Street banks are making a tidy profit on these bond sales.”
The monthly profit from using the Open Markets Operations schedule could be as much as $200 million a month according to Batstone-Carr who estimates profits have been boosted further by the impact of unconventional policy on asset prices and trading operations.
The impact on Main Street is very different, according to Batstone-Carr, who believes public opinion is now increasingly against the extension of the second round of quantitative easing, QE2.
“Irrespective of its success in generating additional revenue and earnings for the Wall Street banks, the average American sees rising prices and dwindling job opportunities,” he wrote.
“The program may have helped keep mortgage rates low but many had already financed their mortgages or were so 'under water' it hardly made any difference,” he said.
Keeping Main Street company in the QE2 losers room are foreign governments holding US debt, according to Batstone-Carr.
“Irrespective of what Dr Bernanke may say, overseas countries and administrations see only a significant inflationary event,” he wrote.
“China and other countries whose currencies are closely tied to the dollar are seeing obvious inflationary pressure and are increasingly uncomfortable. The US is not the only country experiencing low and ebbing growth and the dollar’s devaluation is not helping the recovery in other parts of the world,” Batstone-Carr added.
With the chances of quantitative easing being extended sitting at 50-50 in Batstone-Carr’s view the question now is which vested interest will win the day.
“Some pretty powerful pressure groups are likely to be pushing for additional policy measures but a significant lobby is increasingly vocally against any form of further easing,” he wrote.
“We therefore suspect that the next version of quantitative easing could look very different to that investors have grown used to thus far. Not only might new policy target the longer end of the bond yield curve and also include mortgages, we suspect that the programme could be even more open ended,” said Batstone-Carr.