As previously mentioned, The Federal Reserve determines monetary policy with the intent of maintaining stable prices, maximizing employment, and moderating interest rates as needed. While analyzing the effects of QE2, Mike Ashton - The Inflation Trader - notes the following:
- grain prices are up 17% since August 2010.
- softs (coffee, sugar, cocoa, cotton) are up 56%.
- gold and industrial metals are up, around 20% each.
- crude is up 27% and retail gasoline prices at the pump are up 32%.
- the dollar is worth 10% less on world markets.
- stocks are up 24%
Ashton concludes that:
So if the Fed was trying to pump up stocks or nudge 2y note yields, they did a fine job. Beyond that, what we can see is… and what I’ve been saying all along… if you increase the quantity of money, the main thing you increase is the price level. The only reason you might expect a growth effect is if there is money illusion, meaning people see more money in their pockets and perceive themselves as wealthier because they don’t realize that the dollars are worth less. That is certainly somewhat true, but the figures above suggest that the most pronounced effects were on inflation expectations and the prices of raw commodities.
Well, we shouldn’t forget about this little effect as well: QE2 also kept Tim Geithner in his job for far longer than was good for the country. Obviously, Geithner knows that his job was made easier by the fact that the Fed was buying 85% of the Treasury issuance since November, and virtually 100% of the net TIPS issuance: he has apparently decided to “weigh” moving on from Treasury as soon as the budget deal is done. I’m sure the timing is completely coincidental and has nothing to do with the fact that the next guy is going to have to find a new $600bln buyer to take the Fed’s place (and maybe a bigger buyer, if the Fed ever decides to sell).