Stocks, more than housing, seen as initial QE3 winners

Sun Sep 16, 2012 8:06am EDT
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By Jason Lange and Leah Schnurr

WASHINGTON/NEW YORK (Reuters) - The Federal Reserve's new economic stimulus plan involves printing vast sums of money to help people buy homes, but over the next year the program could do more to boost the economy by lifting stock prices.

The Fed said last week it would buy $40 billion every month in mortgage backed securities until the labor market improves substantially. The program, known on Wall Street as "QE3", will likely lower interest rates for mortgages and also help some people refinance their home loans.

Although the Fed's open-ended buying program represented an unprecedented bid to get the U.S. economy growing more quickly, many economists are skeptical it will have a big impact on housing market which is held back to a large degree by tight lending standards by banks. Mortgage rates are already near record lows, they point out.

But it is also quite possible QE3 will help the economy in other, potentially more powerful ways.

By giving an open-ended commitment to pour money into the market for mortgage-backed securities, the Fed will likely keep on supporting stocks and other asset classes by keeping returns low on MBS. Investors in search of yield will have more reason to buy equities and to lend money to companies.

Peter Hooper, an economist at Deutsche Bank in New York, thinks the Fed's bond buying program will add at least a half a percentage point to gross domestic product over the next year, largely by boosting stock prices and making people feel more wealthy.

"The main transmission mechanism is through the stock market," Hooper said.

Many economists believe people will spend an extra few cents for every dollar of wealth they gain. Because so many people have retirement funds connected to the stock market, a boost in share prices can lead people to spend more money.   Continued...

A view shows the Federal Reserve building on the day it is scheduled to release minutes of the Federal Open Market Committee from August 1, 2012, in Washington August 22, 2012. REUTERS/Larry Downing