Mr. Bernanke: When Is QE3 Going to Work? By George Leong for Investment Contrarians | Oct 25, 2012 Three strikes and you’re out! Too bad the Federal Reserve doesn’t follow this; otherwise, Chairman Ben Bernanke would be on the phone with Wall Street looking for another job. The key stock indices surged to their highest levels in years after the Federal Reserve launched a third round of quantitative easing (QE3) at the September meeting; yet the follow-through has been non-existent, as stocks are back where they were prior to the announcement. All quotations and figures in this article are from a Federal Reserve press release regarding the Federal Open Market Committee meeting in September 2012, dated September 13, 2012 (http://www.federalreserve.gov/newsevents/press/monetary/20120913a.htm). At that meeting, the Fed said, “Information received since the Federal Open Market Committee (FOMC) met in August suggests that economic activity has continued to expand at a moderate pace in recent months. Growth in employment has been slow, and the unemployment rate remains elevated.” The Fed is spending $40.0 billion a month to buy mortgage-backed securities and, in theory, to lower the financing rates. This is the theory, but the yield on the 10-year Treasury stands at 1.76% versus 1.84% prior to the establishment of QE3. Something isn’t working. But maybe it’s still too early to judge the success of QE3. Give it a few months to filter through the system and we’ll see. Jobs creation is expected to be a major benefactor of QE3. The Federal Reserve recognizes that the jobs market continues to be problematic and needs to be addressed despite the unemployment rate falling to 7.8% in September. We still have over 22 million Americans looking for work. “The Committee seeks to foster maximum employment,” said the Federal Reserve. Of course, they would say that, but to make it happen will be difficult, since corporate America is not showing that it is in a growth phase and expanding. In fact, revenue growth has been slow across the board and below estimates in the second quarter. So maybe Bernanke is pulling another fast one here?
To date, the super-low interest rates at between zero percent and 0.25% have helped to prevent the country from falling into the abyss. If not for the low rates, the carrying cost of the $16.0 trillion in national debt would be suffocating and would make the situation even worse. As I said when QE3 was first announced, the plan put forth by the Fed should help in theory, but this is the real world, and there are other variables that come into play that could hamper the Federal Reserve’s plan. “Strains in global financial markets continue to pose significant downside risks to the economic outlook,” said the Federal Reserve. This shouldn’t be a surprise. Europe and the eurozone are in a financial mess, and China and Asia are on fragile ground. In China, we are seeing multinational companies report slowing in the Chinese economy as consumers there cut spending. So while I believe the Federal Reserve was correct in launching QE3, I question how effective it will be and feel the situation is far worse than the Fed wants you to know.