Home > Exchange Rates, Interest Rates, Unemployment > Bernanke turns on the taps once again – NZ$ on the rise

Bernanke turns on the taps once again – NZ$ on the rise

September 16, 2012 Leave a comment Go to comments

It is the US Fed’s intention to buy volumes of mortgage backed securities and keep borrowing rates at near zero (0-0.25%) until the job market and broader economy pick up. Basically they are going to print money until there is some improvement in unemployment figures. Unemployment is at 8.1% and the Fed estimate that it will fall no lower than 7.6% in 2013 and 6.7 in 2014. Inflation is forecast to remain at or below 2% until 2015.

How does it work?
The Fed will buy $40 billion a month in mortgages and will keep doing this until unemployment starts to fall. This will have a couple of effects:

1. It might lower mortgages rates by another 0.25% (already quite low). The 30-year mortgage rate is 3.5% and could go down to 3.25%
2. When mortgage rates go down, the price of houses tends to go up which is beneficial even if you are not refinancing a mortgage
3. Investors tend to move out of low interest earning investments and put their money into stocks. The DJIA closed up more than 200 points and was 625 points off its all-time high.

Impact on NZ$
With the flood of US$ into the market this has put downward pressure on the US$ which will make its export market more competitive and imports more expensive. However risk currencies like the NZ$ and AUS$ have rallied. Looking at the NZ$, this has appreciated considerably against the US$ and will make NZ exports more expensive and NZ imports cheaper. This will not only hurt the export industry as the price of goods become more expensive but the domestic sector have now got to compete with cheaper imports. The NZ$ reached US$0.84 yesterday.

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  1. David
    September 17, 2012 at 4:17 pm

    great cartoon, simple and effective! With NZ economy with low inflation expectations, perhaps room for some of our own QE…..but ensure you fill up your petrol tank first.

  2. September 17, 2012 at 8:31 pm

    Agreed – will a change of Reserve Bank Governor mean a different approach to Monetary Policy? Interesting that there was one objection on the Fed Committee to Bernanke’s QE3 – that person was very concerned with inflation in the years to come. They’re putting some serious money into the system. Who knows if it will work – maybe more government projects to generate growth and employment.

  3. Simon
    September 20, 2012 at 8:01 pm

    At the moment I don’t think anyone quite knows for sure why inflation is so subdued in the face of blatant global money printing.

    I think it is quite possible that although inflation is subdued, compared to what might be being avoided it could be roaring along at a very cheerful pace.

    It is reasonable to imagine that after 20 years of continual GDP growth, massive debt build up and an explosion in financial “innovation” a collapse of unprecedented proportions could be expected.

    Uncontrolled debt deflation would see bank failures everywhere. Asset fire sales everywhere. Sovereign default on international debt and currency crises left right and center in an interconnected world.

    The question should probably be, rather than where is all the inflation, how much deflation was avoided?

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