More of the Same

The long anticipated third round of quantitative easing (QE3) was announced by the Federal Reserve last week. The Fed intends to buy $40 billion worth of mortgage-backed securities each month for as long as they need to until the jobless rate improves.


Ben Bernanke, Fed chairman was quoted as saying, “We want to see more jobs.” at a news conference last Thursday explaining the Fed’s strategy. “We want to see lower unemployment. We want to see a stronger economy that can cause the improvement to be sustained.”

What’s interesting about this round of quantitative easing is that it has the ability to grow very large since it is tied to an outcome; the improvement in the labor market. This tactical shift at the fed shows how dissatisfied the central bank has become with previous efforts to jump-start the economy and that inflation is of no concern for the foreseeable future. The fed also announced that no rate increase will be considered before 2015 (one year later than previous announcements).

By purchasing mortgage-backed securities, the Fed hopes it will lower longer-term interest rates which have shown resistance to the Fed’s earlier efforts.

The move caused investors to pile into riskier assets as expectations are set to see many asset classes benefit from the increased liquidity in the marketplace.

Liquidity and low interest rates are definitely important to stimulate a lagging economy, but they aren’t the only issues consumers and businesses are faced with. Until all the issues are addressed, any growth may continue to come at a snail’s pace.

There’s an old saying that the definition of insanity is doing the same thing over and over but expecting a different outcome. Only time will tell.