QE3 and What it Means

The Federal Reserve announced yesterday it will spend $40 billion per month to purchase mortgage-backed securities because the US economy is too weak to reduce its high unemployment.  The Fed said they will keep buying bonds until the job market shows substantial improvement.  The Fed also extended the plan to keep interest rates at record-low levels until mid-2015. 

Three years into this stuttering recovery, stimulus seems to be the name of the game.  Canada’s sluggish economy will likely get an indirect nudge from the stimulus measures announced Thursday.  Furthermore, China is likely to join the US and Europe’s lead and introduce their own stimulus package later this fall.

“It’s a reflection of the times.  It tells us the enormous challenge the global economy is still facing,” said Craig Alexander, chief economist for TD Bank. 

The bond purchases are intended to spur borrowing and spending by lowering long-term interest rates.  Purchasing mortgage-backed securities and other forms of asset purchases the Fed hopes to revive America’s housing market.  Since the 2008 financial crisis the Fed has purchased $2 trillion in treasury bonds and mortgage-backed securities.   

Skeptics caution that more bond purchases may increase the risk of higher inflation and do little to benefit the economy as rates are already at near record lows.

The Fed is under pressure to act because the US economy is still growing too slowly to reduce the high unemployment rate.  For more than three years the unemployment rate has topped 8%.

The benefit to Canada is that anything that helps the US economy indirectly helps Canada.  Canada’s snail passed recovery is mainly attributed to the weakness in its exporting sector; particularly shipments to the US, our largest trading partner.

The real-world impact of these stimulus measures could simply be to raise business and consumer confidence, boosting investments and household spending. 

Some analysts say not to expect lasting benefits, after the initial rush, economies and markets will again return to levels that reflect the fact that fundamentally little has changed.  In several countries, both governments and households need time to repair the damage caused by years of reckless borrowing and spending.

“History tells us financial excess is usually followed by financial stress,” says Craig Wright Royal Bank chief economist, “We had a decade of financial excess, so we have a decade of stress left, and we’re only half-way through it.”

So is the glass half full or half empty?  If we are half way through the difficult times then I still believe the investment strategy of getting paid to wait is our best option; besides we’re already half way there.

Have a great weekend,

Tracey

Source:  Advisor.ca