All aboard QE2
The Federal Reserve in the United States has announced a second phase of quantitative easing (QE) to boost activity in an economic recovery which has failed to gain real momentum and where unemployment has remained high.
The programme will involve buying $600bn of government bonds; in effect pushing this considerable sum into the economy. The expectation is that this will increase activity through the action of a number of effects. The first of these is the direct result of making more cash readily available to consumers at negative real rates of interest. This will help the indebted and encourage those able to borrow and spend to do so.
The second is that the programme will improve bank profitability and so help repair battered balance sheets. Stronger banks are both more willing and more able to lend. The third effect is via asset prices because some of the cash injection will inevitably find its way into investments such as stocks and shares and possibly houses. This will support the prices of these assets, creating a wealth effect which should make consumers more comfortable to spend.
Investors seeing the determination exhibited by the US authorities to support growth might wonder why their counterparts in Europe are not doing the same; after all the recovery is no stronger and some individual countries remain in recession. The reason is a question of priorities. The ECB view budget discipline as the absolute priority of policy at the moment in order to safeguard the future of the euro zone. Against this more growth is nice to have but may not be something that is immediately affordable.
John Kelly is head of client investment at CCLA
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