Will QE3 Begin Today? Does It Matter?

| September 13, 2012 | 0 Comments

Quantitative EasingToday’s a big day – a day the market has been waiting for since before the summer began.

Of course, today the Fed is expected to announce a third round of bond purchases, otherwise known as QE3.  In fact, two-thirds of economists in a Bloomberg survey believe the Fed will announce QE3 today.

The same economists also predict the Fed will extend the length of its ultra-low interest rate policy into 2015.

So what’s it mean to us anyways?

Well, let’s put it this way…

The past two QE programs have been fantastic for the stock market. 

For various reasons I won’t get into right now, when the Fed previously announced massive purchases of government bonds and Mortgage Backed Securities (MBS), stocks essentially shifted into full-on rally mode.

Actually, much of the recent rally in stocks is due to merely the anticipation of QE3.  However, if QE3 is bigger than expected or involves some new types of purchases or strategies, equities could really skyrocket.

Even if QE3 comes in as expected, along with the extension of zero rates into 2015, investors should continue buying into the stock market.  Fed stimulus tends to serve as a confidence booster to the investment community.

Here’s the thing…

Believe it or not, a stock market rally is exactly what Fed officials are hoping for when they implement quantitative easing programs.

You see, higher asset prices are good for everybody.  When a company’s stock climbs, management is more likely to spend money on business investments or hiring.  And for shareholders, higher stock prices mean more wealth – which the Fed hopes will translate into higher consumer spending.

Look, none of this is guaranteed.  That’s the trick with economics.  The Fed can only make predictions based on the big picture.  They can’t control what actually happens with companies and individuals.

Nevertheless, QE programs have certainly had at least some positive economic effects in the past.  And, with inflation running under 2%, it’s not a threat at the moment.

So why not give QE3 a shot?

Something clearly needs to be done about our stubborn unemployment rate, which continues to hover over 8%.

What I’d love to see (and what I think would be great for the stock market) is for the Fed to put actual targets on the unemployment and inflation rate.

For example, they could announce they’ll continue to buy bonds en masse until unemployment falls below 7%, as long as inflation remains below 3%.  A policy like that would let investors know exactly what it will take for the Fed to stop intervening – and for the economy to get truly on track.

For now, let’s see what happens today… and how the stock market reacts.

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