As expected the Fed will begin another round of quantitative easing. It will buy treasury bonds at the rate of 75 billion a month. Economists and market analysts had expected the Feds to buy between 500 billion and 1 trillion so this amount is at the lower end of the scale.
Quantitative easing is meant to drive interest rates downward--although they cannot go that much lower! More money is pumped into the economy. The policy is also used to fight deflation because with more money in the system prices tend to rise. The quantitative easing has been expected for some time and perhaps stocks have already risen in anticipation of the move. Stocks today barely managed to move into positive territory in the U.S.
Jeff Kleintop a market strategist said:"The market was hoping for something a little more dramatic from the Fed to ensure a more robust economic growth outlook, I don't think the Fed exceeded expecatations enough to prompt investors who have been waiting on the sidelines to step back into the market today." The quantitative easing drives up the price of bonds and lowers yield and this should encourage investors to move money into stocks driving up stock prices. The Fed will also reinvest an additional 250 to 300 billion in Treasury bonds using proceeds of earlier investments. The federal funds rate was kept near zero at a historic low.
The Republicans are seen as more business friendly than the Obama Democrats but there was little reaction by stock markets to the landslide victory of the Republicans. Perhaps too this had already been factored in to stock prices. Quantitative easing had the effect of lowering the value of the U.S. dollar against many currencies including the Canadian dollar.
The Fed remained somewhat bearish on the economic outlook remarking that "the pace of recovery in output and employment continues to be slow." Since low interest rates have failed to stimulate borrowing and demand the Fed hopes that quantitative easing will help. Some analysts disagree and point out the the Fed has already spent 2 trillion in earlier purchases but the economy remains sluggish!
UPDATE; The decline in the U.S. dollar may very well boost U.S. exports as they will become more competitive. China many not be too happy as the U.S. dollars they hold in huge numbers become less valuable! Imports will also be more expensive for U.S. consumers.
UPDAtE: Stock markets on Thursday have reacted to the easing with big gains on the DOW and TSX.