When the Federal Reserve announced last week its plan to buy more treasury securities, only a few read the fine print. Instead, the stock market jumped for joy at the news, leaping nearly 300 points on Friday.
What most market observers saw was the headline: “the [Federal Open Market] Committee agreed today to increase policy accommodation by purchasing additional … securities at a pace of $40 billion per month.” The press release added: “These actions … should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.”
Those observers envisioned sugar plums dancing in their heads as the Fed’s plan would lead, no doubt, to more economic growth, more jobs, more profits, and more stocks to sell on Wall Street.
Catherine Mann, professor of finance at Brandeis University, expressed her doubts that the new plan would do any such thing:
The Fed continues to want the economy to grow faster and specifically, to grow more jobs, but the ability of QE to do that is extraordinarily limited.
We know that QE reduced interest rates, but we also know that has not led to more construction, more mortgages, more business investment, or more lending. Since it hasn’t done any of that, it probably hasn’t created jobs either.
CONTINUED at The New American.
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