OLD Media Moves

Covering QE3

September 14, 2012

Posted by Liz Hester

The Federal Reserve announced Thursday another round of bond-buying, $40 billion a month for the foreseeable future, and said it would continue to hold interest rates near zero until mid-2015. The Fed also said it would continue selling short-term bonds in order to buy long-term securities under a program called Operation Twist.

In order to best understand the move, we gathered some of the most interesting points made by various news outlets in covering the Fed’s decision.

Here’s the Wall Street Journal’s explanation:

Taken together, the Fed will be purchasing $85 billion of longer-term securities a month through the end of the year, an increase from the $45 billion of long-term bonds it is currently buying each month under Operation Twist. It will also be printing more money to fund its mortgage-bond purchases, expanding the size of its $2.8 trillion balance sheet.

The purchases are aimed at pushing down long-term interest rates—especially mortgage rates—and pushing up the values of assets like stocks and homes. The Fed hopes that financial stimulus will boost the beleaguered housing market and spur broader spending and investment.

“The Committee is concerned that, without further policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions,” the statement said.

In addition to trying to influence long-term interest rates with bond buying, the Fed broke new ground on short-term rates. Officials on the Federal Open Market Committee said they expected to keep short-term interest rates near zero until at least mid-2015, beyond their previous estimate of late 2014. In addition, in an apparent effort to demonstrate their commitment to spurring a stronger recovery—and to demonstrate to the public that they won’t veer away from their easy-money policies hastily—policy makers said a “highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens.”

Much of the rational for the Fed’s continued action is its mandate to help create jobs. But CNN Money points out that there’s not much that bond buying will do in terms of putting people back to work. You can read the full story here, but here are a few good points:

However, if QE1 and QE2 created 2 million jobs, it seems reasonable to suggest that a third, smaller round would have an even smaller impact on job creation. Although any gains would be welcome, the labor market remains in a deep hole.

The United States still needs to recover 4.7 million jobs just to get back to 2008 employment levels. The population has grown, and as of August,12.5 million people remained unemployed.

 At this point, the Fed’s power pales in comparison to the potential impact Congress could have by addressing fiscal cliff fears, said Dean Croushore, an economics professor at the University of Richmond and a former Fed economist.

 “Businesses are not hesitant to invest and hire because interest rates are too high — they’re hesitant because of the uncertainty surrounding their future prospects,” he said.

And the New York Times points out that this round is smaller than previous measures taken, but does signal a slight shift in policy:

The scale of the new effort is significantly smaller than the Fed’s previous rounds of asset purchases. The Fed purchased about $100 billion in securities each month during those campaigns. It said Thursday that it would target a rate of about $40 billion a month during the current campaign, although unlike those earlier efforts, the volume is now subject to adjustment.

 The new purchases will mark the first time in more than two years that the Fed has expanded its holdings of mortgage bonds. That decision reflects the Fed’s view that the housing market still needs help, and that lower rates on mortgage loans could provide significant benefits for the broader economy.

 Seeking to increase the impact of its new policies, the Fed also said Thursday that “a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens.”

 The language was intended to make clear that this latest intensification does not solely reflect the Fed’s increased concern about the economy, but also reflects an increased determination to make a more forceful response. It suggests that the Fed is willing to tolerate somewhat higher inflation later to encourage stronger recovery in the coming months, something it once insisted was unthinkable but has gradually come to consider a necessity in order to revive the economy.

MarketWatch also points out that low rates are terrible news for savers, meaning the government is urging borrowing with policy and calling for fiscal responsibility at the same time.

The low yields are not just a concern for savers, but for anyone who is worried that the current bull market could be ending. After a run of four years – or the average length of time for a bull market throughout market history – plenty of investors worry that things could turn for the worse, driven by events in Europe, the “fiscal cliff” in the U.S. and more.

Now, if the latest round of quantitative easing doesn’t work – and its impact is likely to be less than prior rounds of Fed assistance – a growing number of investors may want to head for the sidelines, a place where they can’t hope for much more than avoiding losses.

But stock market investors loved the news, sending the Dow higher even after Bernanke’s press conference. Economists also seem pleased. The WSJ pulled together excerpts from several here.

No matter what the opinion, having clarity and details on the policy should help investors determine their strategies, lending some much-needed stability for the end of the year. With all the other uncertainties such as the fiscal cliff and the looming presidential election, it’s much needed.

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