QE-3

[HawkeyeNFO]

Federal Reserve decides to trigger third easing to help economy
$40 billion of money will be "created" to buy bonds every month from now until the Fed feels like doing something differently. Lower interest rates being the goal, the stock market is up a bunch already, as are the prices of gold and silver.

Over the long term, I see inflation coming, and am very glad that I bought a costly (by e-r.org standards) house with only 10% down on a 30 year VA loan. I've only made 3 payments, but if rates drop, could be refinancing soon.

 

[mathjak107]

with little takers for this money even at near zero ,deflation is a bigger worry. dont be surprised if the price of the house deflates instead of inflates.

with corporations not borrowing and having the highest cash hoards yet and consumers cutting back on borrowing for new goods and services we are in a real pickle.

whats scarey is im a wholesaler of over 15,000 different items,.

i was updating some bids for yearly contracts and looking back to just 2 years ago prices have fallen by quite a bit on so many items.

while energy, food and healthcare is catching the spot light the other sectors are slowing down since we cant by this and that ,just this OR that without wage growth, more income or borrowing money to buy more stuff.

personally i think we may see some deflation for a while before we see any inflation from all these QE'S.

 

[haha]

Won't have much effect on employment, but it sure made the stock market and commodities fly! Natural gas is back to $2.98- I think it was about $2.65 yesterday.

Bountiful Ben must be a commodity speculator.

 

[Gone4Good]

The "QE" is less important than the forward guidance which is really where the traction here is. The comment that they'll buy other assets if the employment situation doesn't improve significantly and that they'll maintain a highly accomodative stance even after the economy improves is a significant move in Fed policy toward Nominal GDP targeting instead of inflation targeting.

This is a really, really big move. Much bigger than QE1 or QE2. With this announcement, the Fed has basically gone all-in to support the economy.

At the very least, we'll soon discover the limits of the Fed's power to influence the real economy. We'll learn if our persistently high unemployment is structural or a result of inadequate demand.

I'd expect to see long rates actually head up on this news as inflation expectations increase. Pundits will be quick to comment that the policy is failing because rates are going up but only because they don't know that a steepening yield curve is a bullish sign.

This is good stuff.

 

[Finance Dave]

with little takers for this money even at near zero ,deflation is a bigger worry. dont be surprised if the price of the house deflates instead of inflates.

with corporations not borrowing and having the highest cash hoards yet and consumers cutting back on borrowing for new goods and services we are in a real pickle.

whats scarey is im a wholesaler of over 15,000 different items,.

i was updating some bids for yearly contracts and looking back to just 2 years ago prices have fallen by quite a bit on so many items.

while energy, food and healthcare is catching the spot light the other sectors are slowing down since we cant by this and that ,just this OR that without wage growth, more income or borrowing money to buy more stuff.

personally i think we may see some deflation for a while before we see any inflation from all these QE'S.

Is that truly deflation though? For example, if they are electronics and the function changes considerably, then it's not like-for-like. I don't know what types of items you sell, but I have not seen too many things drop in price other than "technology" items such as TVs, cell phones, etc. The one place I HAVE noticed it is in restaurants...they have definitely cut prices at many where I eat.

 

[HawkeyeNFO]

Supply and demand. If loans and mortgages become cheaper, the hope is that more people will borrow money and spend it or invest it. The Fed's role appears to be that of ensuring that the government (taxpayers) stays in debt to the bankers.

 

[haha]

The "QE" is less important than the forward guidance which is really where the traction here is.

I read about Michael Woodford's speech on this topic at jackson Hole, and wondered if it was a signal. How NGDP Level Targeting Works - Business Insider

Interesting to see what happens. This is definitely closer to Ben's original idea of dropping money from helicopters.

If you make holding cash balances really unattractive, perhaps even diehards can be induced to spend, and to buy risky investments.

It's an old theory, and an idea that I am not fond of-deliberately destroying purchasing power of existing money.

And since Romney has already said that if he is re-elected, he won't reappoint Bernanke, the Benster knows how the wind is blowing. Clever he is.

Ha

 

[GrayHare]

If the Fed's goal is to stimulate the economy, rather than state it will rein in inflation, the Fed should state it *wants* inflation. The threat of inflation will encourage buying now while prices are low.

 

[Gone4Good]

Interesting to see what happens. This is definitely closer to Ben's original idea of dropping money from helicopters.

It seems to me that Bernanke is very methodically working through the playbook he outlined a long time ago for the Japanese. At the very least, we'll learn whether or not he was right, which itself is an important discovery.

 

[LeavingOhio]

I was for the initial QE, and I was less for QE2, but I'm not sure QE3 was necessary this time. While still sluggish, the economy has been improving, and while it's not as fast as most would like, jobs are being added now each month as opposed to us losing hundreds of thousands of jobs each month back in 2008 and 2009. Bernanke has said that he expects the unemployment rate to remain above 8% into perhaps 2014, and since that is the biggest thing remaining in the Great Recession recovery, I don't understand the need for QE3.

As an investor in the stock market, I enjoy seeing a 200+ point Dow increase, but I think that may be a temporary bounce. Will banks lend more like this round of QE is supposed to encourage? I'm not so sure...didn't seem to spur them on too much in earlier rounds. Also, I'm not so sure I want banks to lend more. I realize that people have turned loaned money into more money, but borrowing money isn't the only way to make it in business, and many businesses and individuals have lost their shirts because of money they borrowed.

I'm not terribly concerned about inflation or deflation or stagflation...there are ways to deal with any of those situations regarding investments (see CD rates in the early 80s for example), so that's not what concerns me about this round...it just seems so unnecessary. We are no where near in the bad spot we were when the first round was announced. At some point you have to let the markets and the economy live and breathe on their own.

 

[Gone4Good]

If the Fed's goal is to stimulate the economy, rather than state it will rein in inflation, the Fed should state it *wants* inflation. The threat of inflation will encourage buying now while prices are low.

That is what the Fed is trying to signal with this statement:

the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens

They're walking a tightrope on this because using the clearer (and probably more effective) language you suggest would likely provoke additional political backlash.

 

[rodi]

I know I'm clueless in this stuff.
But how does buying massive amounts of MBS create long term jobs?
Sure there will be a bump in jobs doing refi's... so escrow/title/brokers will be hiring for a while... But it won't necessarily spur new housing starts, etc...

If the stated goal is to create jobs? What kind of jobs, and how does it do it?

 

[Semiretired2008]

I'm not terribly concerned about inflation or deflation or stagflation...there are ways to deal with any of those situations regarding investments (see CD rates in the early 80s for example), so that's not what concerns me about this round...it just seems so unnecessary. We are no where near in the bad spot we were when the first round was announced. At some point you have to let the markets and the economy live and breathe on their own.

Totally agree. What I am worried about the most is the deeper hole that will be dug with this move that we have to find bigger shovels to get out with. I hope it is only temporary, but our $$ Exchange rates dropped with the announcement today and that impacts us globally...

 

[CCdaCE]

I know I'm clueless in this stuff.
But how does buying massive amounts of MBS create long term jobs?
Sure there will be a bump in jobs doing refi's... so escrow/title/brokers will be hiring for a while... But it won't necessarily spur new housing starts, etc...

If the stated goal is to create jobs? What kind of jobs, and how does it do it?

...and who has the magic/crystal ball that has the perfect unemployment number or the exact trajectory of lowering the unemployment rate?


Everything I see is going up price.
Brass/ammo is going up. Election year? Pffft. What about copper for house wiring, corn (just drought related?), other commodities, etc.
Gas is up (adjust for inflation? - no, in 2008 it was 1/2 the price), doesn't seemed to be linked to crude anymore, always an excuse that only works one way.

Fatburgers are up. At work, laptops are being replaced with desktops since they're 1/2 the cost, I don't recall this being the case before? Lately?

I ain't saying the sky is falling, but it's very confusing to me when I hear someone saying there's no inflation.

-CC

 

[donheff]

The "QE" is less important than the forward guidance which is really where the traction here is. The comment that they'll buy other assets if the employment situation doesn't improve significantly and that they'll maintain a highly accomodative stance even after the economy improves is a significant move in Fed policy toward Nominal GDP targeting instead of inflation targeting.

This is a really, really big move. Much bigger than QE1 or QE2. With this announcement, the Fed has basically gone all-in to support the economy.

At the very least, we'll soon discover the limits of the Fed's power to influence the real economy. We'll learn if our persistently high unemployment is structural or a result of inadequate demand.

I'd expect to see long rates actually head up on this news as inflation expectations increase. Pundits will be quick to comment that the policy is failing because rates are going up but only because they don't know that a steepening yield curve is a bullish sign.

This is good stuff.

I read about Michael Woodford's speech on this topic at jackson Hole, and wondered if it was a signal. How NGDP Level Targeting Works - Business Insider

Interesting to see what happens. This is definitely closer to Ben's original idea of dropping money from helicopters.

I have been trying to follow this stuff and found the announcement somewhat confusing. Various article I read talked about employment targeting (which seems to be what they announced) as somewhat weaker than NGDP targeting but working along similar lines. Is this sort of a halfway move -- or more like a vaguely 2/3 move toward NGDP targeting? Both approaches provide long term assurances and (so the theory goes) should reassure the companies sitting on their piles of cash. It will be interesting to see what comes from it.

 

[Dawg52]

I ain't saying the sky is falling, but it's very confusing to me when I hear someone saying there's no inflation.

-CC

Stocks are inflating, I like that. Listening to the talking heads, most are bullish at least in the short term. I don't know......all this bullish talk makes me nervous.

 

[easysurfer]

I have been trying to follow this stuff and found the announcement somewhat confusing....

In layperson's term, the Fed just goosed the market

 

[Gone4Good]

But how does buying massive amounts of MBS create long term jobs?

It doesn't, at least not directly.

It might be (a bit) clearer if you think of interest rates as a price, just like any other in the market. This particular price equilibrates the supply of savings with the demand for investments. In the current environment, the price that clears the market is negative. Because we can't charge negative interest rates the market can't clear. Instead of loaning funds out, people choose instead to hoard cash even at zero interest rates. Meanwhile, 0% is too high a price for investors to borrow at so they invest less than is optimal, leading to high unemployment.

What is really called for is negative interest rates, which can't be implemented directly but can be created through inflation (0% nominal interest and 2% inflation means a negative 2% real interest rate).

What the Fed is trying to do is to push that price negative toward it's clearing level, or at least convince folks that they will. Creating money to buy stuff, whether MBS or anything else, is just a way to create inflation.

 

[MichaelB]

[mod hat on] Interesting topic, hopefully we can keep election politics out of it. [mod hat off]

 

[CCdaCE]

So, the real question is how can I front run this to make money. Or, wait, they already announced it, I'm a few days late.



-CC

 

[CCdaCE]

In another vein, you need some demand to drive up inflation. That 10 cent elephant deal. It's only a deal if you have 10 cents and need an elephant.

Get that employment machine fired up.

-CC

 

[Gone4Good]

I have been trying to follow this stuff and found the announcement somewhat confusing. Various article I read talked about employment targeting (which seems to be what they announced) as somewhat weaker than NGDP targeting but working along similar lines. Is this sort of a halfway move -- or more like a vaguely 2/3 move toward NGDP targeting? Both approaches provide long term assurances and (so the theory goes) should reassure the companies sitting on their piles of cash. It will be interesting to see what comes from it.

By my read the Fed is implementing an NGDP target without explicitly saying so. Perhaps that is weaker because so much of this is supposed to work through the expectations channel. I guess I'd also agree that the Fed would probably get more bang for its buck by communicating more clearly. But as said earlier, communicating more clearly is probably not politically desirable. So under the circumstances, the Fed is doing as much as I think they reasonably can.

Now we get to see if that is enough. Fascinating stuff.

Edit to add: The reason I think an NGDP target is at the heart of the Fed announcement is because of the statement that they'd maintain high levels of accommodation even after the economic recovery strengthens. You have to think they have something specific in mind here. When does the Fed decide to start removing accommodation? They don't say. A good bet is when NGDP has risen back to trend.

Edit to add II: The reason I don't think the Fed is "employment targeting" is because everyone still remembers the 1970s. If high unemployment is caused by structural problems, all money printing will do is increase inflation without lowering the unemployment rate. The Fed might never be able to achieve its "employment target" under such a scenario. But NGDP is impacted by inflation. As long as the Fed can influence inflation, it can hit an NGDP target. Which means it will have a clear signal to remove accommodation even if unemployment remains stubornly high.

 

[nikon_d40]

This QE3 would only deflate our purchasing power by inflating food / gas cost. It would not help to lower our mortgage rate as the rates are so low now that they will not go much lower in all material aspect. However, deflating the US dollar may improve our export and discourage import, thus may be able to improve our unemployment picture. One thing that I am certain is that gas is going to cost more. Food prices are going to cost more. Any commodities that is based in US dollar will cost more. Improving in employment is not as certain.

 

[traineeinvestor]

Interesting to see at least one member of the Fed say he expects interest rates to start rising sooner than the more commonly quoted 2014 or 2015.

For the rest of the world, more QE will be seen as weakening the USD and pushing up inflation. It will be interesting in a balance sheet enhancing way to see if the Asian stock markets get a pop today.

 

[Khufu]

Edit to add II: The reason I don't think the Fed is "employment targeting" is because everyone still remembers the 1970s. If high unemployment is caused by structural problems, all money printing will do is increase inflation without lowering the unemployment rate.

Except that there is no evidence that current unemployment is being caused by structural problems. It's not as though there's a shortage of programmers but there are too many nurses.