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September 13, 2012

Response to the Fed’s QE3 bond-buying program is mixed

by Rylan Stewart
Wall Street (3)

The Dow jumped 200 points and the S&P 500 had its best close since 2007. The movement came after the Federal Reserve announced its latest quantitative easing program (QE3): an open-ended commitment of $40 billion per month to purchase mortgage backed securities until the employment and real estate have stabilized. Coupled with its other stimulus programs, the Fed expects to add about $85 billion total in long-term holdings per month.

Markets responded with gains, but how about economists? Following is list of reactions that we have noticed regarding the Fed action. As you may notice, the response is mixed.

 

From the Fed Announcement:

“These actions, which together will increase the Committee’s holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.” – Fed statement

 

So… just how significant is the program? How strong is the action?

“They’re pulling out all the stops to try to get this economy to gain some traction and, most important, to get unemployment down.”  - Joe LaVorgna, chief economist at Deutsche Bank Advisors

“This is exactly what Wall Street and, quite frankly, Main Street wanted from the Fed today. Fortunately, this round of QE is certain to keep the country out of a significant downturn. I would liken this to a ‘shock-and-awe’ monetary policy move.” - Todd Schoenberger, managing principal at The BlackBay Group LINK

 

Or maybe it is not so strong…

“Talk about disappointment,” he writes about the size of the program after big announcements for QE1 and QE2. “This incremental stuff is too tentative. … This just sounds so underwhelming.” - Chris Rupkey, the chief financial economist at Bank of Tokyo-Mitsubishi, via the Wall Street Journal

“This isn’t full-blown QE3, it’s partial QE focusing only on mortgages with the apparent intention of propping up market psychology and, more importantly, supporting the housing market.” – from the Forbes live blog covering the event

“The Fed did the minimum to meet market expectations. They did not meet the more aggressive expectations of balance sheet expansion because the economy does not at the moment justify that kind of action.”  - ITG’s Steve Blitz

 

However, others think that this is more extreme due to the language used:

The open-ended nature of this round of QE is a “very aggressive move.” - Reuters reporter Pedro Nicolaci da Costa

 

So if we can’t agree on the strength of the program, can we at least agree: will it be effective?

“We’re not sure what the economic effects of this program will be — it should help growth and employment on the margin — but of all the announcements the Fed could have made today, this is very nearly one of the most accomodative that could have been reasonably expected.” – Dan Greenhaus, BTIG’s chief economist in a note to Yahoo Finance LINK

“But what counts is how the stock market takes it.  When policy becomes this unconventional there are a lot of smoke and mirrors and at the end of the day it is more true than ever that if you think policy is working, it is.  So far so good.  The stock market seems to think it is working.  We are keeping our fingers crossed that Bernanke’s press conference will not lead to some market doubts.” - Chris Rupkey, the chief financial economist at Bank of Tokyo-Mitsubishi, via the Wall Street Journal

 

What will be the effects? Mortgage rates? Real estate?

The FOMC action should bring down mortgage rates and spur a faster turnaround in housing. Construction is up, sales are improving, and prices for existing homes are increasing, but the level of housing activity is still far below normal. The FOMC is expecting its actions to speed up the housing recovery, although tight credit remains a concern.” – Gus Faucher, PNC Economist told Forbes

 

Inflation?

“Most notably, the added liquidity being supplied by the Fed in its effort to create some demand-driven inflation is instead more-often-than-not generating the unwelcome result of supply-push inflation.” – Russel Price, Ameriprise senior economist

 

Of course there is a political side (election year):

“Having these artificially low rates really just underscores the bad economic policies coming out of this administration and the uncertainty that’s out there.” - Rep. Bill Huizenga to CNBC’s “Power Lunch”  LINK

 

So with so much uncertainty, why make the action (11 of the 12 members voted “yes”)?

“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 Fed statement said.

 

 

 

Part 1: Fed Announces $40 per month bond buying program to aid economy

Part 2: Reactions to Fed stimulus mixed

Part 3: Fed program should push mortgage rates lower 

 

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