QE3 To Help Housing
The third round of quantitative easing will raise the stock market by 3.1% and home prices by nearly 2%, assuming the program lasts through 2013, researchers at Deutsche Bank assert.
But not everyone agrees that the move with translate to helping the average American.
The Federal Reserve’s purchases of Treasuries and mortgage-backed securities will sum to $800 billion by the end of the year. The researchers say the purchases will hold longer-term Treasury yields about 50 basis points lower than they would otherwise.
“These financial market effects should eventually be passed through to more than a 0.6% boost to the level of gross domestic product over the next two years, enough to add about 500,000 jobs and reduce the unemployment rate by 0.3% points,” Deutsche Bank said in a research note.
But Deutsche Bank cautions that the expected impact of QE3 is dependent on the fraction of outstanding MBS the Fed ultimately purchases. Increased MBS issuance could suppress the impact of QE3 on the economy, although the Fed would certainly be willing to live with this outcome.
James Frischling, president and co-founder of NewOak Capital said the bond-buying programs and low interest rates hasn’t proven effective at generating the type of growth that can bring down unemployment, but it certainly has fueled a turnaround in the housing market.
“Expect this next round of bond-buying to do more of the same,” Frischling said.
And Christopher Whalen with Tangent Capital Partners feels the two thirds of the mortgage market that cannot refinance their homes will be unaffected by QE3.
The researchers at Deutsche Bank agree with Fed Chairman Ben Bernanke’s assessment that the economic benefit of QE3 is not a panacea. Still, an improved outlook for growth and earnings and lower borrowing costs should encourage business investment.
“However, even if QE3 is able to generate a substantial improvement in growth and earnings prospects and a reduction in borrowing costs, it is likely that its impact on business investment is dominated by the significant uncertainty ahead regarding the debt ceiling, fiscal cliff and Europe,” the researchers say.