Source: Wall Street Journal, Morning Wrap, 30-Oct-2014
“As the Federal Reserve bids farewell to quantitative easing, it’s time to grade the central bank’s final round of stimulus.
The benefits and drawbacks of QE have been subject of a hot debate on Wall Street for years. Many suggest the Fed’s bond-buying program has been a major pillar of a stock market rally that has reached record levels. Others, however, argue that QE proved inefficient in spurring economic and job growth.[pullquote_DD span=”3″ align=”right”]“The currency question along with oil prices, are certainly two of the biggest macro-economic issues facing financial advisors at the moment.” The topic of discussion in a Wealth Professional article which Brent Vandermeer is quoted.
Read the article » [/pullquote_DD]
As WSJ’s Jon Hilsenrath reports, the worst fears about the Fed’s actions – rising inflation and a devalued currency – haven’t come to pass. Inflation, as measured by the Commerce Department’s personal-consumption expenditure price index, has been unchanged at 1.5% since September 2012, when the Fed started QE3. Meantime, the dollar, as measured by the Fed’s broad dollar index, is up 6.7% in value compared to the world’s other currencies.
But its benefits are also questionable. While the unemployment rate has fallen sharply – from 8.1% before the latest program was launched to 5.9% in September – the drop is mostly due to people abandoning the work force. As WSJ reports, some 2.2 million jobs were added in the 12 months before the Fed launched QE3 in Sept. 2012. In the past 12 months, that figure has risen to just 2.6 million, not enough to suggest the Fed’s efforts created a material impact on the labor market.
Where the Fed has succeeded is driving investors into risky assets, such as stocks. The S&P 500 has risen 35% since the Fed launched QE3 and has hit a number of record highs along the way.
The question now: what’s next?
As long as the economy keeps improving, Fed officials hope to raise interest rates sometime in the middle of next year. But such a scenario is far from a given: The past two times the Fed stopped buying bonds, the economy struggled, growth sagged and hiring and inflation slumped. Stocks also fell. In 2010, three months after QE1 ended, the S&P 500 fell 12%. And in 2011, three months after QE2 concluded, the S&P 500 dropped 14%.
But if the jobs market continues to show improvement and the economy remains stable, the Fed is likely to move forward with raising rates sometime next year.
Wrapping up QE is a big moment for the Fed. While widely anticipated, it shouldn’t be taken for granted.”