The Fed’s decision to implement a third round of quantitative easing (QE3) has raised 3 very important questions concerning the economic growth of the USA, whether it will bring about an increase in risky assets or its effect on GDP (gross domestic product) will be similar or somewhat different.
Many argue that the effect of QE3 is more powerful than that of QE1 and QE2. Whilst the previous rounds of quantitative easing have been associated with an increase in equity prices, the duration and size of QE3 are somewhat more substantial.
Moreover, the credit channel seems not to be outperforming these days, as banks hoarded the extra liquidity from the quantitative easing, which created excess reserves instead of increasing lending.
The only way in which the QE can be transmitted to real economy is the effect of an equity market increase. However, there is an argument that the QE3 will contribute to the rise in equity prices. If such thing requires a significant growth recovery of the GDP, it’s tautological to be said that if equity prices rise enough, he result in the increase of GDP justifies the rise in asset prices.
As a whole, the third round of quantitative easing reduces the risk of an economic contraction but it’s highly unlikely that it will bring about a sustained recovery. In the short run, the latest round will contribute to some investor’s taking risk and it will also stimulate asset reflation.