Stocks surged to their highest levels in years on buying optimism driven by the Federal Reserve, following the somewhat surprising and aggressive QE3 plan—that is to implement a third round of quantitative easing—laid out by the Federal Reserve during last Thursday’s Federal Open Market Committee (FOMC) meeting.
In its recent press release, the Federal Reserve states that “Information received since the Federal Reserve Open Market Committee 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.” (Source: Board of Governors of the Federal Reserve System, September 13, 2012)
With the unemployment rate at a stubborn 8.1% and inconsistent job creation, the Federal Reserve recognizes that the jobs market continues to be problematic and needs to be addressed. Trust me, the Federal Reserve realizes the severity of the jobs market, and by pursuing this aggressive stimulus, it indicates that the jobs market situation and economic recovery may be worse than we realize.
“The Committee seeks to foster maximum employment,” said the Federal Reserve. Of course, they would say that, but it will be difficult to make it happen since corporate America is not showing that it is in a growth phase or expanding. In fact, revenue growth has been slow across the board and below estimates in the second quarter.
To try to remedy and drive the economy, the Federal Reserve announced it would also maintain super-low interest rates at between zero and 0.25% into mid-2015 and it will maintain loose monetary policy even after the economy strengthens. We have had this for a while and so far, the low interest rates have not been that effective in driving the economy. In fact, the low interest rates have helped keep the carrying cost of the $16.0 trillion in national debt down. (Read “Why We Might Not Want to Fight the Fiscal Cliff.”)
In addition, the Federal Reserve will buy $40.0 billion in mortgage-backed securities monthly until the jobs situation shows sustained growth. Yes, this will help; but I’m not convinced it will be that effective in sending 12 million Americans back to work. Then there’s also the quality of the jobs being created, which at this stage, are largely lower-wage service jobs.
The plan put forth by the Federal Reserve 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.
For instance, as the Federal Reserve stated, “strains in global financial markets continue to pose significant downside risks to the economic outlook.” 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 China as consumers there cut their spending.
So while I believe the Federal Reserve is correct in launching QE3, I question how effective it will be and feel the situation is far worse than they want you to know.