The Federal Reserve announced a third major round of quantitative easing on Thursday, instantly dubbed QE3. For those of a certain age, “QE” sounds a bit like an ocean liner, and Wall Streeters adept at playing the bond markets will be able to afford another yacht or two in the wake of this week’s events.
Under the new program the Fed will increase its purchases of mortgage-backed securities by $40 billion each month. It will also reinvest principal payments from current holdings, thus increasing the total asset purchase program by roughly $300 billion. This is expected to boost bond prices, thus keeping downward pressure on interest rates, especially in the housing market. The Fed also reiterated its objective to keep short rates near zero until 2015, hoping to dent the stubbornly high national unemployment rate.
Many observers are skeptical. Michael Baron of TheStreet.com reports one particularly bemused response:
RDQ Economics said the action would likely give stocks a temporary boost and expressed some concern about the unintended consequences that could result.
“Our view is that these actions will do little to stimulate growth but will raise inflation expectations (dollar negative and gold and commodity positive),” the firm said. “As for other markets, we think that risk assets will get a short-term sugar rush, which will further support equity prices. What about yields, however, which the Fed is seeking to lower? Our guess is that to the extent the Fed boosts the demand for risk assets, yields will drift higher (as was the experience following the announcement of QE2). Bernanke is marching U.S. monetary policy even further into totally uncharted territory.”
Corporate chief financial officers, who control the capital spending and often the hiring decisions of major companies, don’t seem to be on board either. Duke University’s Global Business Outlook survey indicates that they are not likely to respond to more quantitative easing, even if it drops rates substantially from their already low levels. Matt Egan of FoxBusiness notes that the survey:
showed that 91% of the 1,500 CFOs polled wouldn’t bolster their spending plans even if the Fed’s programs successfully lowered interest rates by one percentage point. And 84% said a hefty two-point reduction in rates wouldn’t change their spending plans either.
“Rates are already at historic lows, so lower rates would not impact our decision,” one survey respondent said. Another CFO said, “We need to see reliable growth before we are willing to invest any further.”
Corporate America seems to be much more concerned with the potential fiscal crisis of rising taxes and spending cuts that will occur if the nation’s lawmakers are unable to pass a credible budget deal late this year. QE3 cannot compensate for such a failure. Is it time to apply the “Three strikes and you’re out!” rule to monetary panaceas?