Leave it to bureaucrats to come up with an acronym which acts as camouflage for the truth.  QE3, Quantitative Easing Part Three, is code for bail-out.  Politicians and bureaucrats are loath to use that term for fear of negative press and political ramifications.  If it looks like a duck, and it quacks like one, it’s a duck!  US Federal Reserve Charmin, Ben Bernanke, announced a couple of weeks ago that the Fed would inject $40 billion a month through purchases of mortgage back securities.  This move by the Fed is viewed as being dramatic in that it is a two pronged approach.  Firstly, there’s no defined time limit and they will not deviate from this policy until they succeed.  What does Fed deem to be success?  Full employment.

Rarely has the Fed exercised its authority and flexed its muscles in a such a manner.  This is a sign that the Fed has little confidence that the Whitehouse, Congress and Senate, will put their bickering and their campaign posturing aside to do what’s right.  This move has put Bernanke into the Republican crosshairs, we can use that reference in Canada because we Canadians wouldn’t take that term literally.  Being so close to the US presidential election, it’s odd that the Fed would make this move now.  Say what you will about Bernanke, he’s injected himself into this political campaign.  I believe his motivation was not political but of necessity.  Managing the economy has not been president Obama’s stronger suite, and the Republicans wouldn’t agree to anything today that Dem’s might suggest.  Fixing the US economy has been put on hold for over a year now because of the length and nature of  presidential campaigning.  Maybe Bernanke was willing to roll the dice because he has nothing to lose.   His tern as Chair expires in 2014.  The Republicans are questioning the need for a Federal Reserve Chairman, and maybe Bernanke has already decided that if asked he will not accept reappointment.  If he does step aside it would be a challenge for whoever replaces him as Chair, given no defined end date for QE3.  It is always easier to make bold decisions about the future knowing that you may not be subject to the consequences of that decision in the future.

The reverberations of QE3 will be felt here in Canada.  Bernanke has stated that the Fed is committed to leaving its target interest rate close to zero until 2015.  A few short months ago the prediction for a rate increase was 2014.  Clearly the Fed believes interest rates are too high in the US to encourage investment and mortgage borrowing.  I am not sure how enamored the Bank of Canada is with this decision.  Up until now the Bank of Canada has been in lock step with the US Fed.  Will they deviate from that?  I highly doubt it.  So, an overnight lending rate increase may have been pushed out for another 12 months in Canada.  That’s good news for consumers, especially for borrowers renewing their mortgages over the next 24 months.  The not so good news is that if you’re a first time home buyer, don’t expect the government to reverse the most recent changes to mortgage rules anytime soon. 

Until next time

Cheers