The best thing that can be said about QE3 is that we’ll never have to natter on and hand-wring and speculate about QE4 — because there will be no QE4.
Seriously. This is it. The Federal Reserve is going to let this one run.
The biggest change in the Fed’s commitment to quantitative easing is that it’s now open-ended. Like The Terminator, QE will not stop until an economic recovery — that is, an indisputable improvement in employment — is on the books.
The idea is to change the game in market expectations. For one thing, there’s no more need to worry about the Fed jacking up interest rates in a surprise move to forestall inflation.
Until the latest policy announcement, a perverse trade had taken hold: Bad news was good news, and good news was bad news. Bad was good because it meant the prospect of more QE. Good was bad because the market feared the Fed would turn of the money spigot.
Thursday’s Fed pledge puts an end to all that.
But it may not do a heck of a lot more.
We’ve been barking about this until we’re blue in the face, but the country is facing a demand problem that monetary policy alone can’t fix. It’s a policymaking — that is, political — problem.
As Fed Chief Ben Bernanke reiterated in his latest press conference: “Monetary policy, as I’ve said many times, is not a panacea. We’re looking for policymakers in other areas to do their part.”
Guess what? He’s right.
Furthermore, Bernanke has no illusions that he and his fellow central bankers are waving a magic wand. Here’s Big Ben’s very own assessment of the potential efficacy of QE3: “I personally don’t think that it’s going to solve the problem. But I do think it has enough force to help nudge the economy in the right direction.”
On the plus side, targeting mortgage-backed securities — $40 billion a month’s worth for as long as it takes — could give the Fed more bang for the QE buck. After all, no recovery has ever gone anywhere without housing.
That’s why the ever-insightful Bill McBride at Calculated Risk is more optimistic than most folks about QE3. “Housing is usually a key transmission channel for monetary policy, and now that residential investment has started to recover — and house prices have stabilized, or even started to increase — this channel will probably become more effective,” he says.
We hope he’s right. But here are five things QE3 won’t fix anytime soon:
- Stubborn joblessness. The Fed’s own forecasts doesn’t see the unemployment rate dropping below 7% until at least 2014.
- Muddling economy. The Fed still sees GDP growth at an anemic 1.7% to 2% for this year, rising to a subpar 2.5% to 3% in 2013.
- Higher food costs. Previous rounds of stimulus have been a boon to speculators in the commodities pits, pushing up the price of everything from oats to rice. Futures for wheat, sugar and orange juice all popped more than 2% in wake of the Fed’s latest pledge.
- Higher energy costs. Like their soft-commodity counterparts, QE gives an adrenaline shot to the energy futures markets, lifting prices for oil and its derivatives.
- The debate over QE. We’ll never know how much worse things would have gone without the Fed’s extraordinary measures, only that it will forever be a matter of counterfactual conjecture and debate. As Yves Smith at Naked Capitalism puts it: “The elephant in the room is what, if anything, these measures will achieve in terms of real economy impact. ‘Let them eat stocks and housing’ has not been terribly successful.”
But you can’t say Bernanke isn’t trying.