Attempting to measure what QE3 will and won’t do
Deutsche Bank economists have tried to quantify what effect QE3 is likely to have on the U.S. economy. For an assumed $800 billion of purchases of both agency securities and Treasuries through the end of next year, the economy gets a little over half a percentage point lift over the course of two years and a net 500,000 jobs – or about two months’ worth of job creation in a typical strong recovery from recession.
In a model-driven assessment based on the past impact of QE1 and QE2, Deutsche Bank Securities chief economist Peter Hooper says this is what the Federal Reserve printing another $800 billion — slightly less than the gross domestic product of Australia — will do:
1. Reduce the 10-year Treasury yield by 51 bps
2. Raise the level of real GDP by 0.64%
3. Lower the unemployment rate by 0.32 percentage points
4. Increase house prices by 1.82%
5. Boost the S&P 500 by 3.06%, and
6. Raise inflation expectations by 0.25%
Apart from the fact we are more likely to win a lottery jackpot of epic proportions than see all of those predictions come true to that degree of precision, the pressing question is whether a 0.32 percentage point reduction in the unemployment rate would be significant enough for the Fed to stop printing money. After all, the Fed tied whether or not it would be satisfied by the results of QE3 to a substantial improvement in the labour market.
When the Fed signalled QE2 was coming, in August 2010, the U.S. unemployment rate was 9.6 percent. At the time QE2 was launched in November 2010 it was even higher, at 9.8 percent. It has fallen 1.7 percentage point since then, to 8.1 percent.
Deutsche Bank economists sum up their six-point assessment as follows (emphasis mine):
Although we would consider this a meaningful impact, we agree with Bernanke’s assessment that it is not a panacea. Most likely, QE3 can, at best, encourage marginal improvement in the stagnating labor market and buffer the U.S. economy against the significant headwinds posed by the continuing uncertainty regarding ongoing euro risk, the fiscal cliff, and the debt ceiling.
Of course the Fed is also hoping that the indefinite promise to print money until they see substantial improvement in the labour may in itself, along with a zero rate pledge, create confidence among businesses to invest and hire. But the sums above alone imply that QE3 probably won’t be enough.