Fed decision ahead; Oracle, Adobe to report - what’s moving markets
On September 13, 2012, the Fed announced a further program of quantitative easing, or QE. The program, which we will all call by its unofficial name, QE3, will consist of purchases of some $40 billion in mortgage-backed securities each month plus continuation of some existing asset purchase programs. We are told that QE is the most powerful weapon left in the Fed’s arsenal—but it is also among the least understood. For the benefit of everyone who wants to understand the mechanics of QE and review its effects on the economy to date, I am posting a QE tutorial in the form of a brief slideshow.
Will QE3 work? All but one of the voting members of the Federal Open Market Commission appear to think it is at least worth a try. In his August 31 speech at Jackson Hole, Fed Chairman Ben Bernanke cited estimates that QE1 and QE2 together have lowered long-term interest rates by 0.8 to 1.2 percentage points. He also suggested that output is 3 percent higher than it otherwise would be and that about 2 million additional jobs have been created as a result of QE1 and QE2.
However, Bernanke also warns that the Fed cannot solve the country’s economic problems alone. “It is critical,” he said, “that fiscal policymakers put in place a credible plan that sets the federal budget on a sustainable trajectory in the medium and longer runs.” At the same time, he warns against excessive short-term fiscal contraction, which could occur if Congress does nothing to mitigate the effects of the so-called fiscal cliff.
The bottom line: “Monetary policy cannot achieve by itself what a broader and more balanced set of economic policies might achieve; in particular, it cannot neutralize the fiscal and financial risks that the country faces. It certainly cannot fine-tune economic outcomes.”
Original post