On Thursday afternoon the Federal Reserve announced another round of quantitative easing (QE3). They will be buying 40 billion dollars worth of mortgage backed securities every month for the forseeable future. Additionally, they will continue their zero interest rate policy until mid 2015. This tells us that the economy is not in good shape. If it were there would be no need for QE3. Stocks, gold and oil will benefit the most, as printing money debases our currency and creates commodity inflation. This will hurt the ones who need the help the most by increasing the cost of everyday items.
Historically the Fed’s decision has been good for equity markets, but as far as we are concerned this is the last of the fed’s ammunition. Last week’s market reaction was expected, but will be unsustainable going forward. Additionally, The Fed said that these policies will stay in effect until we have better employment growth. We don’t believe these transactions will do anything for real employment growth, and since wage inflation is the key component of core inflation, we do not think there will be any. Unfortunately our economy will not heal until there is real employment growth.
