How Long Will QE3 Last?

By Carlstrom, Charles T.; Chapman, Samuel | Economic Trends, December 2012 | Go to article overview

How Long Will QE3 Last?


Carlstrom, Charles T., Chapman, Samuel, Economic Trends


12.28.12

In September, the Federal Open Market Committee (FOMC), the Federal Reserve's monetary policymaking body, announced what has widely been referred to as QE3 (quantitative easing 3). QE3 will consist of purchasing additional mortgage-backed securities (MBS) at the rate of $40 billion per month. Unlike previous QEs, this one was described in open-ended terms, such that "if the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities." The Committee did not specify, however, what "substantial improvement" would be.

Blue Chip Unemployment Rate

Forecasts

         April  May  June  July  August  September  October  November

2012:Q1    8.3  8.3   8.3   8.3     6.3        8.3      8.3        53

2012:Q2    8.2  8.2   6.2   8.2     8.2        8.2      8.2       8.2

2012:Q3    8.1  8.1   8.1   8.1     8.2        8.2      8.1       8.1

2012:Q4    8.0  8.0   8.0   8.1     8.1        8.2      8.1       7.9

2013:Q1    7.9  7.9   8.0   8.0     8.0        8.1      8.1       7.9

2013:Q2    7.8  7.8   7.8   7.9     8.0        8.0      8.0       7.8

2013:Q3    7.7  7.7   7.7   7.8     7.9        7.9      7.9       7.7

2013:Q4    7.5  7.6   7.6   7.7     7.7        7.8      7.8       7.6

         December

2012:Q1       8.3

2012:Q2       8.2

2012:Q3       8.1

2012:Q4       7.9

2013:Q1       7.9

2013:Q2       7.8

2013:Q3       7.7

2013:Q4       7.6

Source: Blue Chip Consensus.

To get an idea of whether labor market conditions going forward might be getting close to triggering this threshold, we look at how labor market conditions have been evolving, especially since September.

[GRAPHIC OMITTED]

In August the unemployment rate was 8.1 percent. One month later it dropped to 7.8 percent. It now stands at 7.7 percent. While the improvement since August could be interpreted as a sign that the unemployment-rate decline is picking up steam (that is, declining more rapidly), professional forecasters don't seem to view it that way. Judging by their expectations for the unemployment rate in the next couple of years, they see it as largely a one-time decrease in their forecasted path for unemployment. In September, the median Blue Chip expectation for the unemployment rate at the end of 2013 was 7.8 percent, and in November it was 7.6 percent. This improvement is roughly the same as the decline in the current unemployment rate from September to November. Macroeconomic Advisors' forecast for the end of 2013 showed a 0.5 percent improvement in the unemployment rate from September to November. But by the end of 2014 the improvement in the forecast was only 0.2 percent.

[GRAPHIC OMITTED]

Unemployment rates are not a complete indicator of labor market conditions. For example, the slight uptick in the unemployment rate from 7.8 percent in September to 7.9 percent in October was largely because the labor force increased. An increase in the labor force can be good news, if (as often is the case in recoveries) the number of discouraged workers decreases as they once again enter the labor force. Discouraged workers are those that drop out of the labor force because they think their job prospects are grim. Since September, the Macroeconomic Advisors' forecast of labor force participation rates in 2013 has shown moderate improvement. …

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