Wall Street gets a rude shock as QE3 put in doubt

published 10 June 2011

The poor data from the US has led many investors to expect the Federal Reserve to launch a third round of quantitative easing (QE3), or money printing, to boost growth. This week Fed chairman Ben Bernanke acknowledged the "frustratingly slow" rebound and said the recovery can't be considered "truly established" until the labour market improves significantly. But he thinks the US is just going through a soft patch and offered no hint of QE3. "Wall Street promptly threw a strop," said Jamie Chisholm on FT.com, with the S&P 500 sliding to a three-month low. Other risky assets also weakened.

What the commentators said

QE2 was hardly a roaring success. The idea was to bolster activity by buying government bonds and thus lowering long-term interest rates. But yields are still higher than when the programme started, says Capital Economics, while the economy is still limping along. That's because, after a credit bubble bursts, "people are simply unwilling or unable to respond positively to the inducements on offer from central banks", said HSBC's Stephen King in The Independent. Banks and consumers concentrate on gradually reducing the large debt loads accummulated during the bubble. Instead of boosting the economy, the printed money seeps into asset markets, which helps explain the strong rally in equities and commodities. The latter has squeezed consumer incomes. Not only has QE not been very effective, but with core inflation rising, fears of money printing leading to inflation would grow with more QE.

Investors are in for "a rude shock", said James Saft on Reuters.com. For years now they have got used to the idea that a weak economy or stockmarket would be juiced by some kind of stimulus. "For many, that is all they have ever known." But "this time is going to be different". Not only is there no QE3 on the horizon, but there is no sign of significant fiscal stimulus from lawmakers. Indeed, the talk now is of cuts. China is slowing and Europe is in crisis. With the economy set to keep struggling and no bail-out in sight, equities and other risky assets "will be hit".