US Fed launches its $600bn QE2 Lifeboat

Lifebelt.pngSo now its official. This week, the US Federal Reserve confirmed it was launching its ‘QE2 Lifeboat’. It will inject $600bn into the US economy, in yet another bid to kick-start full economic recovery.

Clearly, this is a major initiative by the world’s most important central bank. Will it work? And what might it mean for the chemical industry?

The answer to the first question is uncertain. Martin Feldstein, the blog’s favourite economist and one of the very few to correctly forecast the start of the downturn, says it is a:

“Dangerous gamble with only a small potential upside benefit and substantial risks of creating asset bubbles that could destabilise the global economy”.

Feldstein is Harvard’s Professor of Economics, and so his views carry weight.

So what about the 2nd question? Here, markets have already given their answer, pushing the price of crude oil above $87/bbl. They expect QE2 to weaken the US$, and so they see commodities as a ‘store of value’.

This cannot be good for the chemical industry. Rising oil prices will encourage inventory-build, just as we saw in 2007 – H1 2008, and 1979 – 1980. They will also reduce discretionary purchasing power, vital for chemical consumption, as consumers still have to purchase gasoline and heating fuel, even if prices rise.

All in all, therefore, the Fed’s move simply creates more uncertainty, confirming the blog’s fears when it published its recent Budget Outlook.

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. The aim of this blog is to share ideas about the influences that may shape the chemical industry over the next 12 – 18 months. It will try to look behind today’s headlines, to understand what may happen next in important issues such oil prices, economic growth and the environment. We may also have some fun, investigating a few of the more offbeat events that take place from time to time. Please do join me and share your thoughts. Between us, we will hopefully develop useful insights into the key factors that will drive the industry's future performance.

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2 Responses to US Fed launches its $600bn QE2 Lifeboat

  1. Bart Moodie 8 November, 2010 at 5:30 pm #

    Thank you for your insights, Paul. Do you have any further insight as to whether the new Congress will push to reduce this sort of monetary behavior?

  2. Paul Hodges 8 November, 2010 at 6:37 pm #

    Bart

    Thanks for your comment.

    Its still a bit early to say, but clearly newly-elected Sen Rand Paul, and Paul Ryan as likely Chairman of the House Budget Committee, are likely to continue to express their concerns, this time from more powerful positions.

    Its also interesting to see Fed Governor Kevin Warsh joining the debate, and pushing for “better policies”. I plan to write on this for Wednesday, in advance of the G-20 meeting, as Warsh’s critique goes well beyond the USA.

    Paul

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