by Tim McLaughlin, VP Weichert Financial Services
As we near the end of 2010, all eyes are focused on how the markets will finish out the year, and how the rumored effects of “QE2” will further jumpstart the economy. “QE2”, in this case, is not the Queen Elizabeth II, the cruise ship, but, rather, “Quantitative Easing, Part II”, the Treasury and Fed’s collaborative efforts to fuel the recovery, improve the economy, aide employment, and help push inflation rates up a touch.
If you remember in part one, the Fed and Treasury purchased over billions (actually, over a trillion) in Mortgage Backed Securities and Treasuries combine to drive interest rates down.
Let’s explore what the government is hoping to accomplish in part two:
QE2 should help growth via three main channels. First, lower long term interest rates should stimulate various forms of credit sensitive spending such as housing, other consumer goods, capital goods, and state and local construction, as well as further help households reduce interest expense via refinancing. Secondly, higher equity prices should boost consumer spending via the wealth effect and capital spending via a lower cost of equity capital. And third/last, a lower dollar should help narrow the trade deficit.While most of these channels have open questions about their effectiveness in the current situation, they are apt to have a positive net effect.
In summary, Goldman Sachs has estimated that QE2 would boost real GDP growth by 0.5 percentage point per $1 trillion of Treasury security purchases.
Lower long-term real rates should stimulate:
- More housing demand
- More consumer demand for durable goods
- Improved employment picture
- More capital spending
- More construction by state and local governments
- Further refinancing of mortgage
- A lower cost of equity capital
- Higher equity prices, which helps economic activity
- in two ways:
- A positive wealth effect
- A lower cost of equity capital
Certainly, a lot to digest. From a mortgage and housing standpoint, we can see many benefits high level and by digging deeper: more housing demand, more refinancing, improvement in employment which makes borrowers more apt to purchase, higher equity prices = positive wealth = more confidence by real estate consumers. “QE2” is something to watch closely as it evolves in Q4 and 1Q11.
