In line with market expectations, the US Fed announced a new round of quantitative easing last night, and markets have reacted positively.
Specifically, the FOMC decided to increase its balance sheet by buying $40 bln of mortgage-backed securities per month. The longevity of this new program is undetermined, but the FOMC will review its impact after two months. The expected date for first interest rate hikes was also moved out into 2015.
Whilst many are sceptical that such programmes can really help, there are some reasons to expect positive affects – at least in the short- to medium-term. First, the housing market is already beginning to recover, and additional support to the whole sector can only underscore that trend. The Fed believes that the
economy can return to pre-crisis growth rates, and that the housing market is a key component, which is currently lagging. The QE programme might have only a limited direct impact, but it ought to help at the margin.
Perhaps more importantly, the Fed is trying to shift the confidence balance. Whilst we can argue if QE has solved the ills of the crisis, few would disagree that its activation in 2009 was a key component restoring confidence in the economy and thus averting a worse outcome. If the current programme feeds optimism sufficiently, it too will fuel growth.
By contrast, yesterday’s rate hike by the CBR was less well predicted and is unlikely to have a significant impact on Russian real market conditions. Depending on developments, another small hike can’t be ruled out, as the CBR is focussed on building a reputation for fighting inflation. However, I would argue that these rate moves are cosmetic rather than fundamental, as inflation issues are more structural rather than monetary in their nature.
There remain concerns going forward, not least – the incoming
US government will face a significant difficulty planning the 2013 budget. And Europe, although moving forward impressively, won’t suddenly return to growth. But risky assets currently have a clear tailwind. We have pre-selected conviction and high dividend ideas to meet your needs, and we remain at your disposal to help with investment decisions.