Fulcrum Capital on QEIII, Dual Manadate and Ben Bernanke

Fulcrum Capital on QEIII, Dual Manadate and Ben Bernanke

Fulcrum Capital Management, a UK based hedge fund points out how monetary easing from central banks affects the financial picture. The letter emphasizes the change in Bernanke focus strategy and details the thinking behind it. The latest dose (QEIII) of quantitative easing by the Federal Reserve signifies a greater tilt towards sorting out unemployment rather than correcting inflation. These measures contrast with previous rounds of QE when greater weight was given to lowering inflation. It is reasonable to expect that the Fed is not surprised by how the market has reacted to QEIII, that  is by increasing inflation expectations.  It seems that Bernanke is undeterred by rise in inflation beyond its 2 percent target for a while, but is more concerned with solving the unemployment problem with a hands-on approach rather than as a byproduct of other policies. It is worth mentioning that maintaining inflation around 2 percent has been the primary objective on which easing policies are shaped.

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Bernanke has always touted a dual mandate where the implication has been that equal weight will be given to achieving inflation targets and closing the gap in employment but practically speaking, Fed’s more direct focus has been on inflation until its announcement of QEIII on September 13. Neither the unemployment projections have changed since Fed’s inflation focused January 2012 policy nor is their any change in FOMC’s inflation outlook, so the only plausible explanation is that the Fed has weighed in the seriousness of the unemployment and thinks that the slowdown in the labor market requires more urgent attention. Bernanke may fear that the problems in the labor market, if left unattended by the Fed, could shape into a permanent structural problem. The employment gap can be exacerbated in the long term when the labor force downsizes to accommodate in the contracted economy. The participation rate is already declining at a faster rate than it did in previous years (see chart below).


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Fulcrum Capital on QEIII, Dual Manadate and Ben Bernanke

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