$600 Billion For QE2

While there was little doubt that the Federal Reserve would launch ‘QE2’ – a second round of quantitative easing – in an effort to boost economic recovery, there has been plenty of speculation as to what the amount would be, with guesstimates ranging from $500 billion into the trillions of US dollars. The guessing game came to an end when, following its two day meeting, the Fed announced that over the next eight months it would spend $600 billion on long-term treasuries, as well as reinvesting between $250 and $300 billion of the proceeds of previous investments.

This strategy is not quite the ‘shock and awe’ move that many had been expecting, but reflects a more cautious and long-term approach to boosting economic recovery, with around $110 billion per month ($75 billion from QE2, and R35 billion as reinvestment) being pumped into the economy through the purchase of long-term treasuries, continuing until the end of the second quarter of 2011. This strategy may very well restore some measure of investor confidence as the markets are given path of purchase certainty. The Fed is not ruling out the possibility of increasing the size of the program should the economic outlook warrant this once the $600 billion has been absorbed into the economy. Fed officials have, however, expressed their confidence that the $600 billion will make a significant difference to the outlook of the US economy. In a statement the Fed noted that it “will employ its policy tools as necessary to support the economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate.”

With the unemployment rate hovering around 9.6 percent, job seekers on Main Street are no doubt keen to see whether these measures will translate into job opportunities. While investors take a multitude of factors into account when assessing the economy and making investment decisions, there is consensus that consumer spending is the lifeblood of any economy, and consumer spending is dependent on having a job and an income.

Wednesday saw US stocks advancing and retreating in anticipation of mid-term election results and Federal Reserve announcements. The Dow climbed 27 point to finish at 11,215 while the Nasdaq rose 7 points to close the day at 2,540 and the S&P gained 4 points to end at 1,198. No doubt Thursday will bring its own challenges as markets absorb the outcomes of the elections and the Fed’s decisions.