The U.S. Federal Reserve (the Fed) has a dual mandate for our economy – full employment and price stability. Over the past four years our economy has clearly been producing at a level well-below its potential. The unemployment rate has been too high for too long and inflation has consistently been below the Fed’s target for price stability.
So what are they to do? We received the answer on Thursday, when the Fed announced a third round of Quantitative Easing (QE3). With QE3 the Fed is increasing their economic stimulus by purchasing $40 billion of mortgage-backed securities per month for an indefinite time period. The goal is to apply further downward pressure on long-term interest rates, support the mortgage market (i.e. help homeowners) and to make broader financial conditions more accommodative. Unlike QE1 and QE2, no dollar cap or time-limit was placed on this program.
Given that QE3 supports asset values at the expense of triggering higher inflation and devaluing our currency, the ultimate outcome becomes somewhat frightening. We’re not quite sure how this approach will create jobs. Instead, we believe more clarity is needed on tax policy, healthcare costs and budget cuts for businesses to get comfortable hiring and investing for future growth.