The Market’s Reaction to QE3 Is a Little Unnerving

For indispensable reporting on the coronavirus crisis, the election, and more, subscribe to the Mother Jones Daily newsletter.


The Fed’s QE3 program involves the purchase of $85 billion per month of mortgage-backed securities. In June, when the Fed suggested it might “taper” this down to $65 billion, markets tanked. Yesterday, when the Fed reversed course and announced that this wouldn’t happen, bond and equity markets were euphoric and shot upward on the news.

Felix Salmon thinks—almost certainly correctly—that the size of the response to yesterday’s news far outstrips the size of the potential change in Fed bond purchases:

If that is indeed the case, then what we’re seeing is what you might call the QE multiplier — the amount by which every dollar of QE effects the markets as a whole. I don’t know what we thought the QE multiplier was on Wednesday, but in light of Thursday’s market action we might need to revise our guesses: the QE multiplier is, I suspect, much larger than most of us would have pegged it at.

This doesn’t worry Salmon. In fact, he thinks it’s a good thing. It shows that the Fed’s policies have a big bang for the buck.

I agree. And yet….there’s something worrisome about it too. Right now the economy is still fragile, so it’s not surprising that investors reacted positively to evidence that the Fed plans to continue its support. But it’s not that fragile, is it? The reaction of the market really does seem out of whack with the likely impact of the Fed’s program.

So we have a few possibilities. The first is that QE3 has a big impact and investors realize that. Alternatively, it could mean the economy is more fragile than we think and investors are reacting to that. Or maybe it’s not especially fragile, but markets don’t believe it and are far more skittish than they should be. Or it could mean that QE3 is mainly just a profit-making opportunity for financial institutions, and they’re reacting rationally to it.

Three out of four of these are bad things. I’d feel a lot better about yesterday’s news if I were sure that none of them was the real explanation for the market’s apparent euphoria.

FACT:

Mother Jones was founded as a nonprofit in 1976 because we knew corporations and the wealthy wouldn't fund the type of hard-hitting journalism we set out to do.

Today, reader support makes up about two-thirds of our budget, allows us to dig deep on stories that matter, and lets us keep our reporting free for everyone. If you value what you get from Mother Jones, please join us with a tax-deductible donation today so we can keep on doing the type of journalism 2020 demands.

payment methods

FACT:

Mother Jones was founded as a nonprofit in 1976 because we knew corporations and the wealthy wouldn't fund the type of hard-hitting journalism we set out to do.

Today, reader support makes up about two-thirds of our budget, allows us to dig deep on stories that matter, and lets us keep our reporting free for everyone. If you value what you get from Mother Jones, please join us with a tax-deductible donation today so we can keep on doing the type of journalism 2020 demands.

payment methods

We Recommend

Latest

Sign up for our free newsletter

Subscribe to the Mother Jones Daily to have our top stories delivered directly to your inbox.

Get our award-winning magazine

Save big on a full year of investigations, ideas, and insights.

Subscribe

Support our journalism

Help Mother Jones' reporters dig deep with a tax-deductible donation.

Donate