Analysts weary of new US stimulus measure
Updated: 2012-09-14 11:05
By Ariel Tung in New York (China Daily)
The US Federal Reserve announced another stimulus program on Thursday, saying it will buy $40 billion in mortgage debt per month and continue to purchase assets until the employment outlook improves substantially.
QE3 "should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative," the Fed's official statement said. Its objective is to lower interest rates and mortgage rates to encourage more spending.
The Fed has tried quantitative easing measures twice before. During the financial crisis, the Fed bought mortgage-backed securities and Treasury bills in order to boost the economy. By June 2010, the bank had purchased about $2.1 trillion in assets. Two months later, the Fed introduced QE2, buying up another $600 billion in assets.
Analysts say this third round of quantitative easing "will do almost nothing", since the US has already been flooded with liquidity.
Derek Scissors, senior research fellow at the Washington-based Heritage Foundation, said QE1 had bolstered the US economy during the peak of the recession but that QE3 will achieve very little.
"The US is in the same monetary position as Japan has long been in and China is also in now. When there is too much money floating around - liquidity - more money has little impact," he said. "QE3 is a political action, not economic."
Yukon Huang, senior associate at Carnegie Endowment for International Peace and former World Bank's country director for China shared Scissors' sentiment that the stimulus program will not do much. He said the problem is with companies not willing to invest and hire more workers.
"The most important aspect of QE3 is not what it actually does but the symbolic gesture that the Fed will do whatever it can to help get growth going. Thus confidence building is its purpose," Huang said.
Some observers believe QE3 will indirectly benefit the Chinese economy. China's exporters may benefit from stronger consumer demand in the US, said Li Daokui, a former advisor to China's central bank. China's exports rose less than 3 percent for the second month in September. In July, China's exports grew by only 1 percent from the previous year.
The yuan has depreciated since May as China's economic growth swoons. The dollar, on the other hand, has strengthened against the backdrop of the eurozone debt crisis.
"QE3 could weaken the dollar. But it is unlikely that China will allow the dollar to weaken against the yuan. The effect on China will be very small," Scissors said. "QE3 will have less of an impact on China since speculative flows are currently moving out of China rather than in. Thus pressures to appreciate the yuan because of QE3 will be less than the previous QE, but that doesn't necessarily mean no impact," Huang said.
The Fed's second round of quantitative easing had its share of critics. Mike Englund, chief economist at Action Economics, said "a string of bad things started happening" since the Fed adopted QE2.
"QE2 aggravated the decline in the dollar and boosted commodity prices. They have tried to down play this," Englund told the Wall Street Journal.
The QE2 even had a detrimental effect on the China's economy, said Zhang Shiqing, professor at the School of Economics of Nankai University in Tianjin. "The QE2 did not boost the economy or revive the job market. The reality is that the depreciation of the US dollar increased the cost of imports from China and pushed hot money into Chinese capital market."
The first two stimulus programs came at a sensitive time for many economies, including China's. Zheng Hui, finance professor at Shanghai Fudan University, said that since the first two rounds of quantitative easing, more greenbacks have been circulating in the global market, weakening the value of the dollar against other major currencies. Given that international commodities are priced in dollars, everything from oil to sugar has become more expensive, he argued.
Some analysts think there is some significance in the QE3. "It signals a change in policy stance, which is now much more proactive," said Zhang Zhiwei, a Nomura economist in Hong Kong.
"My view is that this is a courageous move by the fed and I applaud it. Rather than politicizing the Fed, it proves they are independent and willing to do what they believe is right regardless of the political fallout," said Sherry Cooper, chief economist of BMO Financial Group.