Is The Fed’s QE Actually Helping Us?
There’s always a hefty amount of discussion going on regarding the merits of the Fed’s various QE programs. The so-called unconventional monetary policies are quite the divisive topics in Washington, on Wall Street, and on Main Street.
And it’s no wonder no one can agree on the value of QE – the impact of the programs is murky at best. You could make the case the massive Fed bond buying is saving the US from recession/deflation, or you could argue it’s having no effect at all.
There are points backing up both cases… which means the truth is likely somewhere in between.
So is QE worthwhile or not?
In my opinion, you can sum up the worthiness of QE in two simple words: why not?
You see, because of political ineptitude in Washington, fiscal policy is not much of an option. There will be little to no economic support from the government because no one will be able to agree on what or how much should be done.
So it’s up to the Fed to keep the economy afloat and make sure we don’t fall into another Great Depression. They’ve already pushed interest rates to essentially zero. That leaves “unconventional” policy as the only option.
In other words, QE can’t hurt. The main criticism of QE is that it will cause runaway inflation by vastly increasing the money supply. Yet after five years, it’s clearly not the case.
It appears consumers and businesses are too busy adding to savings or paying down debt to spend any additional money that QE might provide. And as long as that’s the case, inflation isn’t a concern.
Besides, inflation won’t happen overnight. It will start to show up in the economic data and allow the Fed to react. Keep in mind, the Fed has a strong track record of being able to combat inflation. It’s deflation that’s the killer.
So once again, why not?
We might as well see if bumping up asset prices (due to QE) can help the economy over time. As it stands now, the risk of falling into another recession (or worse) is much greater than the risk of hyper-inflation.
For us options traders, I believe the current situation means there’s a floor on equity prices. As long as QE continues, equity prices should hold up. And if QE ends, it means the economy is doing much better.
Either way, the major equity indices are more likely to go up than down. I’d consider either buying cheap calls or selling expensive puts on dips in any of the major index ETFs.
Yours in Profit,
Gordon Lewis
Category: Options Trading
