Vol 8 (2011) - Issue 1

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The US Post-Banking Crisis Economy

Quantitative easing ensures low risk-free rates, which in combination with economic growth (albeit modest) is a powerful market driver for asset prices. That said, US financial markets remain vulnerable to the 'on/off' risk appetite cycle associated with specific characteristics of a post-banking crisis economy: De-leveraging; slow re-build of wealth; slow employment recovery; and low inflation.

QE2: The 'Bernanke Put'/

The process of balance sheet repair is far from over and the Federal Reserve wanted to move the process along. In early November, the Fed delivered a second round of quantitative easing (QE2), in the form of USD 600 billion Treasury purchases between November 2010 and June 2011 and left the door open for additional purchases if conditions warrant them: that is the 'Bernanke Put'. The reasons are straight forward: The Fed has missed on its dual policy mandates of 'price stability' (Exhibit 1) and 'full employment' (Exhibit 2), has been worried about the risks of a Japanese-style deflation scenario (Exhibit 3) and has recognized that the composition of Congress will deliver fiscal policy gridlock (Exhibit 4).