QE3 could push US economy to breaking point, says Chillingworth
Rathbones’ CIO claims the inflationary consequences of the stimulus measure will increase the pressure on consumers and may do more harm than good.
The inflation that will result from the latest round of quantitative easing (QE) in the US could rise so high that it derails the very recovery the stimulus measure was brought in to support, according to Julian Chillingworth (pictured)
, chief investment officer at Rathbones.
The Federal Reserve last night announced the launch of “QE3” which will see it buy $40bn of mortgage-backed securities every month to reduce borrowing rates for homeowners in the hope of stimulating the housing market and creating jobs.
While Chillingworth thinks Ben Bernanke has helped market sentiment in the short term, he believes the chairman of the Federal Reserve’s actions could increase pressures on the consumers.
He said: "The inflationary consequences of Bernanke’s move – higher commodity prices, most notably oil – could reach a break point, choking the consumer and tipping the economy. That’s the paradox."
Despite his worries over inflation, Chillingworth believes that many positives will also result from this latest bout of quantitative easing.
"The policy of sustaining low mortgage rates is providing a powerful stimulus that should work its way through to consumer sentiment and help elevate spending."
In addition, Chillingworth believes the positive impact of QE on employment levels is debatable.
“We have come across analysts who are highly sceptical of the benefits of QE on employment levels,” he said. “Some estimate that a further $500bn of QE will only reduce unemployment by a few tenths of a percentage.”
“Combined with the on-going debt problems, it is clear that the Fed alone cannot fix the economy, and government policy-makers must act as well.”
Even though the price of gold has dropped 0.18 per cent today at the time of writing, it has rallied over the last few days, due to the implications of the liquidity measures.
Gold has traditionally been viewed as a currency in itself during periods of inflation. However, Chillingworth believes that investors should be wary of its recent relationship with equity markets.
"Gold should provide a barometer (of inflation), but its recent correlation to risk assets needs to be watched closely by investors looking to leverage off QE3."
, director of asset allocation at Fidelity Worldwide Investment, believes that QE3 has addressed some of the major issues faced by the US and will bring it much-needed respite.
"Once again the Fed has upstaged the ECB with a powerful and open-ended easing programme aimed right at the core of the problem – housing finance," he said.
"We're hopeful this ease will help trigger a new economic upswing but these things don't happen overnight. Soft economic data could create some good buying opportunities in the next few months."
Keith Wade, Schroders' chief economist, believes that the implications of a new bout of quantitative easing will reduce market headwinds for the bullish investor.
"Markets love it and risk assets have rallied on the news. The search for yield will become even more acute and investors will be driven into riskier assets in the search for income."
However, Wade remains sceptical that QE alone will have a lasting impact on the economy and believes other stimulation measures are now required.
"Stronger markets will boost wealth and confidence," he commented.
"However, there is growing disenchantment with QE as many question how simply printing money can affect decisions to invest in the real economy. Much of the QE so far has ended up trapped in the banking system rather than being lent."