Deutsche Bank Research

Fed’s QE3 – playing with fire

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QE, interest rates & equity prices (graph)

The open-ended USD 40 bn per month MBS-purchase program will stay in place – or will be even expanded – until the Fed sees an ongoing sustained improvement in the labour market. Furthermore, the Fed extended its conditional commitment to leave rates rock-bottom until mid-2015.

After allowing the global liquidity bubble to develop in 2006/2007 by leaving interest rates too low for too long, the Fed is telling us that it is prepared to make the same mistake again. Moreover, the promise to keep extremely expansionary monetary policy in place even once things have normalised contains a substantial inflation risk given the usual time-lags of monetary policy. Risky assets continue to surge, turning a blind eye to the weakening global economy. Further USD weakness as a result of QE3 will also provide headwinds for the European crisis countries. In the US political hotheads on both sides will have a field day fighting over the fiscal cliff since the Fed will pay the bill for even the most irrational behaviour.

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Published with kind permission of Deutsche Bank Research.

 

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