QE2 to End on Schedule; Stimulus Need Mostly Gone: Janney’s Luschini

Policy largely successful, with need for QE3 unlikely

The economic stimulus strategy known as Quantitative Easing 2 (QE2), according to Mark Luschini, economic strategist at Janney Montgomery Scott, has largely done its work, and should come to an end on schedule on June 30 with small likelihood of a follow-on QE3 to take its place.

Mark Luschini of Janney Montgomery ScottLuschini (left) said in a report issued Friday that the need for QE2 had diminished as the policy had been largely successful in its aims—“to reflate the economy and risk assets to stimulate inflation and consumption through an increased wealth effect”—and therefore, although he expects the policy to remain in effect until its stated end date of June 30, he does not expect it to be followed by a QE3.

As Luschini pointed out, equity markets have come around; consumer prices are moving higher, and gains in employment are being reported. All these factors have combined to bring about the ends intended by the policy, although, added Luschini, the movement of interest rates upward raises questions about the effectiveness of QE2.

A GDP growth rate of 3%, coupled with a move away from deflation and sustained expansion, he added, should put to rest any notion of a QE3—although he conceded that, should the economy exhibit “significant renewed weakness,” the Federal Reserve may change course. However, he cited additional factors that he said point away from any such event: “plentiful” bank reserves, an unemployment rate moving downwards, a lack of political will for further intervention, and disagreement within the Fed itself over whether QE2 even need be allowed to run its course till the end of June.

While bond yields may see some pressure, he said, a large rise in yields is probably not in the offing. And bonds are not an attractive option currently, he pointed out, with yields so low they are not tempting unless there is no growth of the economy. As a result, stocks and commodities are preferable portfolio components.

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