US monetary conditions remain loose.:Macquarie Research

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US monetary conditions remain loose
Event
 Six weeks out from the end of QE2 and US interest rates are falling.
Impact
 Together with new lows for the US$, the American economy is headed for the
end of QE2 with monetary conditions that remain extremely loose. Indeed
they have loosened noticeably over the past three months.
 This is coinciding with clear evidence of both lower bank lending standards
and greater demand for credit.
 It is a monetary backdrop that will sustain US growth well beyond the end of
QE2.
Analysis
 The transmission mechanism from the end of QE2 to weakness in the US
economy and financial markets was supposed to be tighter monetary
conditions. Rising interest rates and a consequent rise in the US$ were
supposed to be the means by which the withdrawal of Federal Reserve
support is converted into an economic slowdown.
 With the end of QE2 now just six weeks away, these shifts should be starting.
Yet this is just not happening. In fact US monetary conditions are easing
rather than tightening and this is potentially a major plus for American
economic growth over the second half of 2011.
 Most obvious is the decline in US government bond yields. Contrary to the
forecasts of some well-known asset managers, US long-term interest rates
have fallen markedly since peaking in February. While still above the trough of
late 2010, US 10-year yields are extremely low.
 Five-year real yields are matching the low of late 2010. The five-year TIPS
yield is negative once again and this is much lower than the yield that
prevailed at the end of QE1 in March 2010.