Tuesday, September 18, 2012

QE3 and the Economy


Fed’s Evans Says QE3 Will Make Economy More Resilient

Federal Reserve Bank of Chicago President Charles Evans said the central bank’s third round of quantitative easing will help the economy keep growing despite headwinds from Europe’s debt crisis as well as potential U.S. tax increases and spending cuts.
“Given the slow and fragile recovery, the large resource gaps that still exist, and the large risks we face, it remains clear that we needed a more resilient economy,” Evans said today according to prepared text of a speech in Ann Arbor, Michigan. The Fed’s actions last week “provided a more accommodative monetary policy that can help us achieve such resilience.”
Evans has been among the most outspoken advocates for additional monetary stimulus from the Fed in the past year. In an Aug. 27 speech he called for the Federal Open Market Committee to engage in open-ended asset purchases, a strategy that was adopted by the Fed in its Sept. 13 decision to purchase $40 billion a month in mortgage debt until the labor market improves.
“We’re going to look at the labor market and the way the economy is going and also inflation pressures, and if it seems like we need to continue to do this, we’ll continue to do this next year,” Evans said in response to audience questions.

Operation Twist

The central bank will have to consider continuing the mortgage-debt purchases into 2013 and should purchase additional Treasuries once the central bank’s Operation Twist program expires in December, Evans said.
The Fed maintained Operation Twist, selling about $45 billion of short-term Treasury securities a month and buying about $45 billion of longer-term Treasuries, even as it began purchasing $40 billion a month of mortgage-backed securities.
Evans told reporters after the speech that a pace of $85 billion in mortgage-backed securities and Treasury securities may be appropriate into 2013.
“We’re looking for stronger employment growth, some beginning declines in the unemployment rate and stronger growth,” Evans said. “I’d be surprised if we would see enough evidence of that by the end of this year. So under that conditioning, I would expect that we would continue at something like an $85 billion pace of purchases post December.”
The Chicago Fed chief renewed his call for the policy makers to provide accommodation as long as unemployment remains above 7 percent and the inflation outlook is under 3 percent. Evans said that although the Fed did not adopt this policy last week he supports the QE3 decision “wholeheartedly.”

Disappointing Growth

Evans said the Fed’s actions will help strengthen a pace of growth that has been “disappointing” and help counteract “greater downside risks posed by the slowdown in global economic growth, the economic turmoil in Europe and the fast- approaching U.S. fiscal cliff.” If Congress doesn’t act, more than $600 billion in automatic tax increases and spending cuts will take effect starting in January.
Evans raised his growth and inflation forecasts in response to the Fed’s new program and now sees the unemployment rate falling faster, the policy maker told reporters.
“My own projections did have somewhat stronger growth because of that,” Evans said. “If I’m looking for -- as one benchmark -- seeing the unemployment rate fall below 7 percent, I think it will happen much sooner than if we had not undertaken that action.”

‘Heroic Forecast’

Evans said unemployment could fall below 7 percent by the end of 2014.
“I don’t think that’s a heroic forecast,” he said.
The FOMC took action last week following a Sept. 7 Labor Department report showing the economy added 96,000 jobs in August. The unemployment rate dropped to 8.1 percent from 8.3 percent as 368,000 people left the labor force.
Evans said that the central bank’s policy has been unable to have its full effect on the economy because not all mortgage holders have been able to refinance.
“We’ve been fighting against a variety of issues that are clogging the effectiveness of the monetary policy transmission channel,” Evans said in response to audience questions. “Normally it’s the case that when you have such a large amount of monetary stimulus in place we would have seen an enormous refinancing wave of mortgages.”

Underwater Borrowers

Yet many borrowers who are underwater, or owe more on their mortgage than the value of their home, are unable to refinance and “if there were adjustments made in those refinancing programs we could deliver much more effectiveness of our policy accommodation,” he said.
In addition to undertaking QE3, the Fed said last week that economic conditions would likely warrant holding their target interest rate near zero through at least mid-2015, extending a previous date of late 2014. The Fed said low interest rates will remain appropriate for a “considerable time” after growth strengthens.
The Fed is contending with a slowing economy. Gross domestic product climbed by 1.7 percent in the second quarter, down from 2 percent in the first quarter and 4.1 percent in the fourth quarter of last year.

Highly Accommodative

“Stating that we expect to keep a highly accommodative stance for policy for a considerable time after the recovery strengthens is an important reassurance to households and businesses that Fed policy will not tighten prematurely,” Evans said.
Stocks and commodities have rallied since the Fed said on Aug. 1 that it would “provide additional accommodation as needed to promote a stronger economic recovery,” foreshadowing the launch of QE3 last week.
The Standard & Poor’s 500 (SPX) Index rose 6.3 percent from Aug. 1 to yesterday. The S&P GSCI index of 24 commodities has risen 6.4 percent in that time period.
Evans said the Fed should be willing to risk a little more inflation in order to help improve the labor market. The Fed should “not be resistant” to policies that lower unemployment closer to its longer-run level “but run the risk of inflation running only a few tenths above our 2 percent goal.”
Evans, 54, became president of the Chicago Fed in 2007 after serving as the bank’s director of research. Fed presidents rotate voting on monetary policy with Evans voting next year.


Alberto Mancusi said...

I agree with most of the points of QE3. they are strong and make much sense so that our economy can be more resilient. one of the topics that fed's evans covers is lowering interest rates. In this economic state many people cannot afford high interest rates on their mortgages and other loans and debts. lowering the interest rate on these will actually allow people to finally pay off some of thier debt instead of just paying the interest that has been accrued over time. finally after paying off their debt they can start using the extra money to spend on items which will have an ending result in boosting the economy.One point in this article that im not to fond of is the fact that they are willing to risk an increase of inflation. I know risks are part of everyday life but they are risking enough already by wanting to buy out $40 billion in mortgage debt.

Kaitlyn Siriano said...

I think most everything that QE3 is trying to do is a good idea. Lowering interest rates under mortgages will help the economy because people will now not be paying so much money to pay off their mortgages interest, so that will give them more money to consume more goods. I also think that if inflation rates start to increase, it is a sign of economic growth, which is a good thing.

KaitlynMcCormickCavanagh said...

The article "Fed's Evans Says QE3 Will Make Economy More Resilient" by Joshua Zumbrun and Mark Clothier was very interesting. In the article, the authors discuss Charles Evans and how he has been a huge advocate for additional monetary stimulus from the Fed in the past year. Charles Evans is the Federal Reserve Bank of Chicago President. Evans is quoted as saying "The central bank's third round of quantitative easing will help the economy keep growing despite headwinds from Europe's debt crisis as well as potential U.S. tax increases and spending cuts." Charles Evans has many great and innovative ideas to help out the economy. Evans asked for the Federal Open Market Committee to engage in open ended asset purchasing, which was excitingly adopted by the Fed on September 13 when they decided to purchase $40 Billion a month in mortgage debt, until the labor market improves. In response to audience questions about this topic, Evans said “We’re going to look at the labor market and the way the economy is going and also inflation pressures, and if it seems like we need to continue to do this, we’ll continue to do this next year.” Evans has very high hopes for the labor market and believes that by the end of 2014, unemployment could fall below seven percent. As of September 7th, the Labor Department’s report stated that unemployment had fallen from 8.3% to 8.1%, which is a nice improvement. Another interesting point that I read in the article was that Evans feels that the Fed should want to risk a bit more inflation if it helps to improve the labor market. I agree with that point and feel that even if there was a little bit more inflation, if the end result was an increase in the labor market, then it would be worth it. I thought that this was a great article and it taught me things about our economy that I did not know.

Nick Terrasi said...

I agree with some of QE3's opinion statements. I feel that QE3 will make the economy resilient. One thing that struck me in this article was that he wants to lower intrest rates. I feel that if the intrest rates lower, than people will be able to pay off their mortgages easier. This will be more important for the middle class because then the economy will hit a boom due to the drop in the intrest rate. If the intrest rate drops than people will spend the extra money they would have spent on their mortgage on buying goods which helps the economy. Then more people will be buying goods and helping the economy rather than not buying as many goods as you would like to if you did not have the money for them. We are looking for a economic growth for this economy and we will not achieve that if we raise intrest rates and have tax increases. I feel that in his speech on August 27, he wanted the Federal Open Market Committee to purchase 40 billion a month in mortgage dept is a great idea if it can be done. If this is done properly then the economy will be able to rise from where it is now. People will be willing to spend more money into the economy as much as possible because now they do not have that big of mortgage now and they know that the government helped them once and they will do it again if possible. Overall, if the intrest rates on mortgages fall than people will be willing to put money into the economy causing a economic boom for the United States.

Imerlyn Ventura said...

In the article “QE3 and the Economy” by Joshua Zumbrun and Mark Clotheir, it explains why Federal Reserve Bank of Chicago President Charles Evans thinks the third round of quantitative will improve the economy. I agree that the central bank should consider continuing the mortgage-debt purchases, because it is helping families afford their mortgages. Hence, more families won’t lose their homes. However, I don’t think we should risk inflation because there isn’t an economic growth. Just because prices are going up doesn’t mean that the labor market will benefit.

Destiny Reid said...

I agree with QE3 with the lowering interest rates on the mortgages. The economy will grow in a positive way if this is changed because currently, people are losing their houses and such because they cannot afford to keep up with payments. With this change, people will be able to pay off other things like loans and other debts instead of just mainly focusing on the mortgage. As for the increase in inflation, I don't think it would be all that good. However, if people were able to save money because of the low interest rates, they would be spending maybe a little more money by buying goods, which will also help the economy grow. So, maybe it's not all that bad.

Anonymous said...

Tessy Punnose said...
Fed Evans might say that by QE3 may help the economy may be able to spring back up, but by putting more money will just help the stock prices to have a upward spike. However in the long run it once again will devalue the currency and cause more inflation to grow. Rather I found a program called PACE bonds, or Property Assessed Clean Energy bonds can help the economy and the people. By this program it can allow a growth in the local jobs, saves consumers money on utility bills and neutralizes tax and gives no exposure to general fund. I see this as a more concrete idea Fed should have talked about.

Aaron Berube said...

I agree with much of what Evans has predicted about QE3. Lowering interest rates on mortgages will definitely help to stimulate the economy. If people have less money to pay back, they will have more money to spend, and thus, more money will be pumped into the economy. Mortgage issues were a large part of the cause of this recession in the first place, and finding a solution to the thousands, if not millions of those affected can only benefit our economy. I too believe that if we continue to improve like we have been for the past two to three years (however slow and steady it may have been), unemployment will drop below 7% by the end of 2014. The potential risk of inflation by several tenths of a percent is worth the potential reward for decreases in unemployment and increases in consumer spending. However, I do believe that inflation should be very carefully monitored to avoid any significant change.

Chris Olsen said...

I believe that this article has many strong points on how to strengthen the economy. I agree with them but the one I agree with the most is lowering the interest rates on mortgages. By doing so you will allow people to be able to save money and therefore instead spending that money buying consumer goods and stimulating the economy by doing so. I believe that idea will definitely work to help strengthen the economy.

Ariana Lulani said...

I agree with the QE3. They absolutely need to start lowering interest rates. People are paying so much money every month just towards interest that they don't even have enough money to pay their actual debt. To them, their money is just being wasted on nothing. So if they lower these interest rates, or give people a certain amount of time with no interest, they would be able to pay off their debt and actually start to afford "wants". This can help boost the economy greatly. Therefore I completely agree with the QE3

Luis Lleshi said...

The QE3 has very strong points. The interest rates are certainly a problem. They are too high for people to afford, and lowering them will help people to be able to afford paying back their mortgages and other forms of debt. Another point that is not so strong from my point of view, is pumping 40 billion dollars into the economy to help out those with mortgage debt. Now this may probably help these people, but how about the rest of the people who may have money saved up that may not mean as much now because of inflation. Lowering interest rates is the best bet to stimulating the economy.

Alison Wu said...

I believe that Evan's opinion on QE3 is accurate. By lowering interest rates there will be many benefits. People are not able to afford paying back their mortgages now because of their high interest rates. By lowering the interest rates not only will people be able to start paying their mortgages back but they can also be able to afford to put there money elsewhere which will help put more money back into the economy. There will also be a higher chance of people taking out mortgages if they are affordable. The article also mentioned inflation which will help with the unemployment rate and hopefully help stabilize the economy.

Briana Finelli said...

Lowering interest rates with QE3 would certainly aid our economy, short- and longterm. If homeowners have lower interest rates to pay on their mortgages, they have more money to spend, thus pumping more money into our economy. Considering mortgage interest rates were part of our initial issue, it seems that QE3 is exactly what our country needs to stimulate the economy. The risk factor involved in implementing QE3 would be the only point I am on the fence about, but a rise in inflation hints at economic growth, so perhaps the risk is worth the hopeful result.

Anonymous said...

Louie Fortes said...
I agree with Evans. I agree that treasury securities will help Americans in debt so they will be able to spend their money to stimulate the economy. If congress does not make a decision soon then spending cuts and tax increases will be in our near future. I liked how the heroic forecast actually was more of a warning. He stated how the labor department added 96,000 jobs but the unemployment rate still dropped from 8.1 to 8.3. This makes me believe that these policies and handouts aren't really helping, or they were put into affect too late. Evans spoke mostly about his predictions but i hope some of them are carried out.

Stephanie Cappa said...

I agree that something needs to be done to expedite the growth of the economy but I dont think government spending will do the trick. trying to attack the housing market and lower interest rates would probably be their best bet. Currently, many people cannot afford to buy their own home and renting is not able to benefit the economy or the construction companies. At this point risking inflation really would not be so bad considering the economy is not growing anyway

Stephanie Cappa said...
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