Alroy Commentary - QE3 – Is it work?
U.S. Federal Reserve launched a new round of stimulate measures, termed QE 3 see explanation, in 13th September. Three months after the launch of QE3, it is a good time for us to see is QE3 work.
In QE3, U.S. Federal Reserve buys USD 40 billion of Mortgage back Securities (MBS) in the market every month. By doing this, U.S. Federal Reserve would like achieve the following targets:
- To restore the consumer and business confidences – consumers are more willing to spend and businessmen are more willing to invest and hike once they are optimistic to the future.
- To drive down mortgage rates – low mortgage rates can create more demand on housing and accelerate the recovery of housing market. Sluggish housing market is one the reasons of slow recovery of U.S. over last 4 years.
- To boost the bank lending by pumping money into banking system– Bank lending to customers and corporations can create more economic activities.
U.S. business confidence from ISM increased to 51.70 in October of 2012 from 51.50 in September. Consumer confidence index from Conference Board increased to 73.7 in November from 68.4 in September. QE3 seems boost the consumer confidence successfully but fail to boost the business confidence.
30 years fixed rate mortgage from Freddie Mac declined by 0.21 percent between 13 September 2012 and 22 November 2012. The rate hit the lowest level in last 10 years. Economists may argue the movement of mortgage rate can be partly explained by the decline of Treasury Rate. However, QE3 still achieved part of its mission by driving down mortgage rate.
To monitor the bank lending activities, we can observe the excess reserves of U.S. Banking. Excess Reserves are bank reserves that exceed the requirement by Central Bank. If banks lend to corporations and consumers aggressively, the excess reserves are likely to shrink. Since the launch of QE3, the excess reserves of U.S. Banks dropped by less than 1 percent, which can be considered as insignificant.
To conclude, the impact from QE3 to U.S. economy is not impressive so far. One of the possible explanations is after the announcement of QE3, U.S. consumers and businessmen shifted their focuses to the uncertainties from U.S. Presidential election and “Fiscal Cliff” in quarter 4. Spending and borrowing plans may be postponed. Meanwhile, the size of monthly purchase in QE3 is not large enough. It needs to take a longer time to influence the economy. Investors should focus on long term impact from QE3 rather than short term.
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