There are some differences worth noting. For starters, this latest round of quantitative easing is the most aggressive we’ve seen so far. The Fed did not put an expiration on buying mortgage-backed securities, saying only they will continue to do so as long as necessary. That’s a change from earlier rounds. And then there are promises to keep interest rates near 0% for another three years (which will keep dividend-paying stocks like CALM attractive for a long time).
That said, you’re right to ask the question, as Chairman Ben Bernanke himself said the Fed can only do so much, and that quantitative easing is just one component of economic policy. Consumers and businesses are really waiting for a cohesive (and cooperative) economic policy out of Washington, but I don’t think we’ll see anything concrete until after the November election.
The Fed’s efforts are to stimulate borrowing by both businesses and consumers as well as lend support to what looks like the beginnings of a recovery in the housing market. I actually think the biggest potential impact of the Fed’s move is that it could encourage more risk taking in the market?, raising financial asset prices, which in turn will increase economic activity through the wealth effect. Creating economic recovery through monetary policy rather than real growth is risky, but I believe the seeds of recovery have taken root. They’re just taking a long time to blossom. As long as the fiscal cliff is addressed by the people we elect to represent us, I expect the economy to continue to gradually strengthen, and maybe this will be the last round of quantitative easing for a while.
Thanks for the question. As always, if you have questions or comments, feel free to email me at service@kramersinnercircle.com.