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Derrick Strauss answers questions about the U.S. Central Bank’s bond buying program.
Q: What is QE3?
Derrick Strauss: QE stands for quantitative easing. The 3 indicates this is the third round of the program.
Q: Who funds this program?
Derrick Strauss: The U.S. government, via central banks.
Q: How much does the U.S. buy out each month?
Derrick Strauss: Originally, it was $40 billion, which was raised to $85 billion in December.
Q: We understand that Ben Bernanke recently announced a change to the QE3 program?
Derrick Strauss: He said that the Fed would begin tapering the dollar amount starting in September. He hinted that this would begin with a $20 billion per month decrease. However, that hasn’t happened.
Q: Will the program remain in effect through the end of the year?
Derrick Strauss: Most strategists predict that the tapering will not actually begin until at least the beginning of next year.
Q: What determines whether the Federal Reserve makes changes to QE3?
Derrick Strauss: Job growth, the housing market, and unemployment rates, as they are the main indicators of how the economy is doing overall.
Q: Why would the federal chairman announce a change and then not follow through?
Derrick Strauss: The number of new jobs created earlier this summer fell far shorter than expected, although the overall unemployment rate dropped to 7.4 percent.
Q: How does this affect U.S. equity funds?
Derrick Strauss: We saw a $40.3 billion inflow in July of this year after June saw a nearly $70 billion outflow.
Q: And investors are dumping bonds?
Derrick Strauss: Yes, in July alone investors got rid of more than $21 billion in bonds. This creates higher yield, which is the reason the Fed has had to rethink its tapering plan.
Q: What does this say about the growth of the economy?
Derrick Strauss: Hopefully that we will continue to avoid another recession.
Q: Will the economy see a steady recovery?
Derrick Strauss: Yes, but it will be modest. I don’t think that investors will see such volatile up-and-down gains in the coming years as they did before the recession.
Q: Is the program going to end?
Derrick Strauss: Eventually, yes, but Bernanke said it would be mid-2014 before that would happen.
Q: Is moderate growth enough to convince the Fed to pull the program?
Derrick Strauss: The real question is if the growth is sustainable. If it’s not, the Fed will likely continue its buyout program.
Q: And if it is sustainable?
Derrick Strauss: The markets will go back to normal, and the federal government won’t resort to such drastic measures as a sort of bailout.
Q: Many experts disagree on whether the Fed should even continue to plan. Why such mixed messages?
Derrick Strauss: A lot of that has to do with not scaring the public. When you have the government making any sort of move it tends to freak people out.
Q: Not even considering government programs, in your opinion, how does the housing industry look today?
Derrick Strauss: The housing market is definitely strong. We’re seeing more than fair interest rates and a number of new homebuyers every month.
Q: Just one final question. Is the U.S. the only country that has used a program like this?
Derrick Strauss: No, Japan actually just recently announced that it would expand its asset purchase program by nearly $1.5 trillion over the next two years. The European Central Bank, the Swiss Central Bank, and the Bank of England have all implemented similarly structured stimulus programs.