JP Morgan warns QE3 could hit, not help, the US economy

Tim Wallace
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INTEREST rates could rise rather than fall as a result of the latest round of money printing announced by the Federal Reserve last week, analysts at JP Morgan warned yesterday.

The potentially unlimited asset purchases under the latest quantitative easing programme (QE3) could increase inflation, pushing up yields and so hurt the economy rather than make it better, according to the bank’s global strategist Dan Morris.

Fed leader Ben Bernanke said he will purchase an additional $40bn (£24.6bn) of mortgagebacked securities every month until the economy improves and unemployment begins to fall substantially, arguing that it is vital to show the Fed is absolutely committed to boosting the economy.

Markets jumped in response, but Morris believes that may show equities could becoming detached from fundamentals, relying on a steady flow of equities instead of actual earnings.

The research argues the overall benefits of QE have been overstated.

“Our analysis of the drivers of core sovereign debt yields since the beginning of the crisis show the key influence over the last few years has principally been worries about a breakup of the Eurozone and falling growth expectations,” he explains.

“Quantitative easing has had little discernible effect.”

And not only does Morris expect QE will not work to lower interest rates, but he also fears it could do additional damage but encouraging inefficient investments.

“Low interest rates today on Treasuries and across the entire fixed income spectrum likely mean that some parts of the economy are or will be getting too much credit at too low a rate, with the inevitable pain once markets readjust,” he said.

Further more, he fears the impact when the time comes to unwind this extraordinarily loose monetary policy.

“Once economic growth begins to recover, it will be no small challenge to unwind this huge stimulus without affecting economic growth and asset prices.”