QE2 Launched, for Better or Worse

The plan calls for the purchase of $600 billion worth of securities, bringing the central bank's holdings to nearly $3 trillion.

November 4, 2010
By Dees Stribling, Contributing Editor

Courtesy Flickr Creative Commons user epicharmus

Most of the commentary on Wednesday was about the election and What It Means, but amid all the noise the Federal Reserve quietly–and expectedly–opted for QE2, which is to say more government bond-buying on the Fed’s own balance sheet to stimulate the economy. The plan calls for the purchase of $600 billion worth of securities, bringing the central bank’s holdings to nearly $3 trillion.

“The pace of recovery in output and employment continues to be slow,” the Federal Open Market Committee, the Fed’s policymaking panel, said in a typically bland statement on Wednesday. “Employers remain reluctant to add to payrolls. Housing starts continue to be depressed. Although the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, progress toward its objectives has been disappointingly slow.”

Not everyone on the FOMC was on board with QE2. “Voting against the policy was Thomas M. Hoenig,” the Fed said (Hoenig is head of the Kansas City district and an inflation hawk; he was the only one voting nay). “Mr. Hoenig was concerned that this continued high level of monetary accommodation increased the risks of future financial imbalances and, over time, would cause an increase in long-term inflation expectations that could destabilize the economy.”

Freddie Losses More in 3Q

Freddie Mac reported a 3Q10 loss of $4.1 billion on Wednesday, $1.6 billion of which was a payment to the government during the quarter. That was some improvement compared with the second quarter, when the loss was $6 billion, and 3Q09 as well, when the loss was $6.7 billion.

Still, the aggregate losses are racking up. Together with the larger GSE Fannie Mae, the cost of bailing out the two so far has been about $259 billion–roughly equal the entire 2009 GDP of South africa or Thailand, just to give the numbers a sense of proportion.

What’s the future for the GSEs now that there will be a new Congress in January? Maybe more of the same. Dan Fasulo, managing director of Real Capital Analytics, told CPE that the Democrats will be disinclined to change anything and the Republicans will be “too scared to tinker with” such an important source of capital for such a major part of the real estate industry.

ADP Sees Modest Employment Gains

It’s time again for the ADP jobs report, which is always on the Wednesday before the U.S. Department of Labor official monthly report on employment, with which ADP doesn’t always jibe. According to ADP, private-sector employment increased by 43,000 from September to October on a seasonally adjusted basis, and not only that, the change from August to September was revised from a 39,000 loss to a 2,000 loss.

Better than a loss, but “employment gains of this magnitude are not sufficient to lower the unemployment rate,” the report noted. “Given modest GDP growth in the second and thirds quarters, and the usual lag of employment behind GDP, it would not be surprising to see several more months of lethargic employment gains, even if the economic recovery gathers momentum.”

Wall Street responded to the election with a resounding ho-hum. On the other hand, investors reacted when QE2 was finally announced. The Dow Jones Industrial Average ended up 26.41 points, or 0.24 percent, while the S&P 500 gained 0.37 percent and the Nasdaq advanced 0.27 percent.