Quantitative Easing; If It Looks Like a Duck, Swims Like A Duck, and Quacks Like a Duck…

According to Wikipedia, there is a simple test that is a form of a deductive reasoning. This is the usual expression: If It looks like a duck, swims like a duck, and quakes like a duck, then it probably is a duck. The test implies that a person can identify an unknown subject by observing that subject habitual characteristics. It is sometimes used to counter obscure arguments that somethings are not what they appear to be.

This phrase seems to of been coined by Indiana poet James Whitcomb Riley (1849 – 1916) when he wrote, “when I see a bird that walks like a duck and swims like a duck and quacks like a duck, I call that bird a duck.”

In the case of statements made by Federal Reserve Chairman Jerome Powell today he emphatically stated that although the U.S. central bank will start expanding its balance sheet “soon.” However, Chairman Powell also highlighted that this will not be quantitative easing repeating, “This is not QE. In no sense is this QE”. Although the Fed Chairman reiterated that all decisions made by Fed members are formulated as a net result of heavily data dependent information, any way you look at it still looks like a duck.

During the annual NABE conference in Denver, Chairman Powell said, “[The Fed will] soon announce measures to add to the supply of reserves over time.” Further more he made comments as to the statement released in March in which they indicated that in regards to balance sheet normalization, at some point, we will begin increasing our securities holdings to maintain an appropriate level of reserves. “That time is now upon us.”

According to Investopedia, “Quantitative easing is an unconventional monetary policy in which a central bank purchases government securities or other securities from the market in order to increase the money supply and encourage lending and investment. When short-term interest rates are at or approaching zero, normal open market operations, which target interest rates, are no longer effective, so instead a central bank can target specified amounts of assets to purchase. Quantitative easing increases the money supply by purchasing assets with newly created bank reserves in order to provide banks with more liquidity.”

Which causes one to ask one simple question. If quantitative easing (QE) is the name for a strategy that a central bank can use to increase the domestic money supply, and Chairman Powell today said that U.S. central bank will start expanding its balance sheet ( a way of creating new money by selling bonds, what should we than call this action by the Federal Reserve?

In 1964 a phrase by United States Supreme Court Justice Potter Stewart simply stated, “I’ll know it when I see it”. It is a colloquial expression by which a speaker attempts to categorize an observable factor event, although the category is subjective and lacks clearly defined parameters.

As in the case of statements made by Chairman Powell today abductive reasoning can be applied to form a clear conclusion.  If his statement is a form of logical inference which starts with an observation or set of observations, and then seeks to find the simplest and most likely explanation for that observation, it must be a duck.

Wishing you as always, good trading