US FED Q3 – Known and Stimulating with Implications

Quatitive Easing

US Federal Reserve Announces Third Round of Quantitative Easing – September 13, 2012

Known Factor

In a widely anticipated move, the US Federal Reserve announced today that it will conduct a third round of quantitative easing (QE). The primary difference between QE3 and the Fed’s previous two quantitative easing programs is that QE3 asset purchases (which will amount to $85 billion per month, including $45 billion in mortgage debt) are open-ended and, most importantly, will continue until there is a substantial improvement in US labour market conditions. That is, the Fed has tied the duration of its latest program of asset purchases to an explicit macroeconomic objective. The Fed also extended its commitment to keep its target Federal Funds rate at near zero levels through at least mid-2015.

Stimulation

The theory underlying quantitative easing is that asset purchases will stimulate the economy by lowering long-term interest rates, including interest rates on mortgage debt, thus encouraging investment while giving a much needed jolt to the US housing market. While the evidence for the impact on growth and employment from past QE programs is mixed, pairing open-ended asset purchases and a commitment to keep interest rates low for an extended period with a specific objective has much support in academic literature.

Implications

The implications of the Fed’s announcement for Canadian interest rates are two-fold. One, the commitment by the Fed to keep interest rates at near zero levels until mid-2015 further constrains the Bank of Canada’s ability to raise interest rates over the same period. Particularly as Canadian exports have already softened under the weight of an appreciating loonie. Second, already low long-term bond-yields will likely price-in a continuation of very low short-term rates and will therefore likely remain at historically low levels for an extended period which should keep Canadian mortgage rates well-anchored to current historically low levels.

“Copyright British Columbia Real Estate Association. Reprinted with permission.”

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*Disclaimer: Statistics Courtesy REBGV. While believed to be accurate they are not guaranteed.
**Numbers provided may vary as they are dynamically posted by the REBGV.

Reader Comments:

Whitebear Says:
September 13th, 2012 at 2:58 pm

There are already bidding wars in Seattle.

Those real estate bears in Vancouver that have been waiting for the last year for the real drop may just need to take what he can take now. Ha ha….

Sean Says:
September 13th, 2012 at 7:07 pm

One more implication. Fed program to buy Mortgage backed security to save US housing market UNTIL MARKET IMPROVES SUBSTANTIALLY makes the US housing market way more attractive and safer for investors … such as those HAM. And what that leads us on the subject of Vancouver housing market? Do I need to say it?

vanpro Says:
September 13th, 2012 at 7:44 pm

The US has had QE1 and QE2 plus negative real interest rates for at least 4 years: did not result in house prices increasing – house prices plunged during that period (i.e. since 2008). Japan has had QE for the past 20+ years, yet their deflation in real estate prices has continued for the last 20 years – i.e. since their bubble burst in 1991…..When sentiment and negative expectations take over, it’s too late for the central bank or govt. to do anything and the losers will be those that paid bubble prices….

Rob Says:
September 13th, 2012 at 8:07 pm

Because the last 2 QE did such a good job of saving real estate in US. All this will do is push prices of oil/gas and foods to new highs. Thus the consumer uses more and more of his hard earned money to pay for everyday goods.

Anon :) Says:
September 14th, 2012 at 1:38 pm

Exactly why *most* buyers would be INSANE to buy now. We know rates will stay low and we are on the edge of a crash….

We just signed a new lease and are sitting back to watch it all unfold… 🙂

panbao Says:
September 14th, 2012 at 2:36 pm

@Sean

HAM is relatively less interested in US markets, due to worldwide taxation implications and residency considerations related to the IRS. Also, the obvious CDN petrodollar hedge is an added bonus!

Btw, on a per capita basis, HAM loves Canada – too many guns in the USA….

Sean Says:
September 14th, 2012 at 4:18 pm

@panbao

Actually most Asian consider US the #1 choice, Canada is just on top of the alternative destination list. As matter of fact, some of them use Canada as a transfer to the final destination – USA.

All the things you listed are no comparison to their LOVE of USA. Before, the problem was just way too difficult to get into the states. But situation has changed quite a bit in the past few years.

Rob Says:
September 14th, 2012 at 7:37 pm

QE3 could prove to push fixed rates skyward. Interesting days ahead for bond market in US.

September 17th, 2012 at 12:19 pm

QE hasn’t worked in its last 2 iterations and it won’t work this time. The Fed is trying to reflate housing and hoping the “wealth effect” will encourage more household spending thus creating demand followed by hiring.

The result will be hiring all right, BUT the hiring will be in China and not the US. QE will remain in place until there is a substantial improvement in employment. Well, Good Luck.

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