The Federal Reserve announced a new round of quantitative easing, known as QE3, to boost economic growth and promote employment. The stock markets and investors reacted very favorably, building on an already strong run over the last two months. The new round of quantitative easing will be executed by the Fed through expanding its holdings of long-term securities with open-ended purchases of $40 billion of mortgage debt a month. It will essentially pump liquidity into the market and boost asset prices, thereby creating a temporary wealth effect.
Thanks to rising stock markets, a seemingly improving economy and a general feeling of increased confidence in the future, people feel wealthier and less likely to want to change the status quo. With just a few weeks to the election in which the economy and jobs are the biggest issue on voters minds, QE3 may just provide the catalyst that gives President Obama the edge when it comes to getting re-elected.
Clearly the Republicans are aware of this and were scathing in their criticism of the Federal Reserve and its chairman. Republican presidential nominee Mitt Romney called the Federal Reserve’s third round of quantitative easing another “bailout” for President Barack Obama’s economy, while other GOP members wondered whether Fed Chairman Ben Bernanke was doing the administration’s bidding by calling for the jolt to the economy. They also questioned the timing of the Fed’s action, just before the November presidential election.
Romney campaign policy director Lanhee Chen said in a press release: “The Federal Reserve’s announcement of a third round of quantitative easing is further confirmation that President Obama’s policies have not worked. After four years of stagnant growth, falling incomes, rising costs and persistently high unemployment, the American economy doesn’t need more artificial and ineffective measures. We should be creating wealth, not printing dollars.”
Fed Chairman Bernanke though sees QE3 as a much needed measure to boost a flailing economy and tackle stubbornly high unemployment, rather than as another “Obama stimulus” political move. He reiterated that, “monetary policy is no panacea for the problems currently faced by the US economy….a much bigger issue right now is the fiscal cliff, which adds to the already high uncertainty about the economic outlook. As a result, businesses are delaying investment expenditures and are more cautious about hiring. Accordingly, today’s monetary policy decision is unlikely to have any perceptible impact on the labor market and the US economy in general“