QE3 has landed.
In its third round of extraordinary measures to support the economy, the Federal Reserve said Thursday it will start open-ended monthly purchases of $40 billion worth of mortgage-backed securities.
As was largely expected, the Fed also remained committed to Operation Twist, where it swaps short-dated securities for long-dated ones, and extended its pledge to keep short-term rates near zero through to least the middle of 2015 from late 2014.
In other words, the market got pretty much exactly what it has been handicapping ever since last week’s August jobs report came in short of the runway, landing gear up.
QE, or quantitative easing, is the when the Fed buys up debt securities with newly minted money. It’s supposed to keep interest rates low at the long end of the yield curve, thus spurring borrowing and spending — as well as forcing investors into riskier (and supposedly more productive) assets.
And we just got round three.
The sad part is pretty much everyone knows that QE3 won’t do much to make GDP go up or unemployment go down. If low interest rates were the key to recovery, we’d be in orbit by now.
But the Fed has to do something. (How much worse things would be in the absence of these moves will always be a matter of debate — counterfactual conjecture on the part of economists and historians.)
The crux of the problem with QE3 comes down to this, as Peter Boockvar, equity strategist at Miller Tabak, puts it:
“Does anyone outside of the Fed think that any new policy news today, in the context of already historically low interest rates, will alter the behavior of any lender, corporate CEO, small business or large, or any individual consumer? Will the decision to build that plant, make that loan or buy that car or home be triggered by any new news by the Fed today? I think not.”
Apparently the Fed felt it had to pull the trigger — and, heck, let’s face it: It did.
But as we said ahead of the central bank’s decision, QE3 won’t overcome the fundamental hurdles, economic anxiety and political uncertainty strewn in the path ahead.
Yes, QE3 certainly bolsters the case for risk-on assets, which have been going gangbusters ever since the European Central Bank pledged to save the euro in late July.
U.S. stocks went vertical after the Fed announcement, led by that most sensitive of pro-cyclical sectors, financial stocks. Predictably, the dollar slipped, while the yield on the benchmark 10-year Treasury note rose just as predictably.
So much for “sell the news.”
But that doesn’t mean the stock market — or economy — is saved.
With third-quarter earnings set to go negative, slower global growth, the November election and looming “fiscal cliff,” don’t be surprised if a QE3 hangover leads to a much more volatile trading pattern ahead.