At its meeting earlier this week, the Federal Reserve announced its plans to purchase $600 billion in Treasury securities over the next 8 months, or at a rate of about $75 billion per month. This second round of quantitative easing — QE2 as it’s quickly become known — is designed to “promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its [the Fed’s] mandate.”
The last part of the statement refers to the Fed’s dual mandates, as directed by Congress: full employment and price stability. At the moment, of course, unemployment is just shy of 10 percent. Inflation, as measured by the BLS’s Consumer Price Index, is slightly above 1 percent.
QE2 is an effort to boost employment and perhaps asset values, by putting more money into the system through the Fed’s purchases of Treasury securities, which this article in the Kansas City Star explains.
What does all this mean for corporate finance and treasury folks? Ben Campbell, president and chief executive officer, and Lance Pan, director of investment research, both with Capital Advisors Group in Newton, Mass., offered their insights.
For one thing, the program “generally supports a declining dollar and the export market,” says Campbell. That should be good news for American firms trying to expand into foreign markets.
Not surprisingly, officials in other parts of the globe take a dimmer view of the plan, as their exporting firms may suffer. Wolfgang Schaeuble, Germany’s finance minister, criticized the policy, saying, “… one could get the impression that the U.S. is doing through other means what it is reproaching China for,” referring to the U.S.’ ongoing criticisms of what it sees as China’s efforts to maintain an undervalued currency.
The Fed’s actions also mean that the “low-yield environment may be more prolonged than forecast,” Pan writes in a research note. Short-term rates may remain near zero for much of 2011, prompting other short-term securities, such as commercial paper and money market funds, to follow suit. “Accordingly, a moderately longer portfolio duration may be warranted,” Pan adds.
Additionally, the QE2 program likely will concentrate on Treasury securities with maturities of 2 to 10 years, Pan writes. This could lead to potential appreciation in the value of these securities. “Total return investors may be able to shift portfolio allocations to explore these opportunities and enhance returns,” he notes.
Finally, by laying out its intentions and a time frame, the Fed provides the markets with some predictability, Campbell says. That’s good, he adds, since “the market can adjust and anticipate the environment.”
At the same time, corporate finance departments will want to stay abreast of the Fed’s actions, and the reactions from both investors and politicians. The Fed is moving into uncharted territory and the outcome isn’t certain. ###
By Karen Kroll