Expect QE4 But No Economic Boost

If the next big thing from the Fed works, it may be entirely in our heads.


If QE4 is indeed on the way, brace yourself for a very small impact. Of all the Federal Reserve's massive bond-buying programs, this one could easily have the least effect. And yet there may be good reason to keep the printing presses going.

Wednesday's Fed statement comes amid widespread buzz about a fourth round of quantitative easing, known as QE4. The expectation is for a broadening of QE3, in which the central bank currently purchases $40 billion in mortgage-backed securities per month. With the year-end expiration of Operation Twist, the Fed's program to sell short-term bonds and buy long-term bonds , some economists now believe the Fed will decide to purchase an additional $45 billion per month in securities. Will it work? Maybe, but it will mostly be in our heads, say analysts.

[Read: One Month Post-QE3, Federal Reserve Maintains Status Quo]

"I think it would be more of a psychological effort to try to convey to markets the idea that the Fed is still in the game," says Adolfo Laurenti, deputy chief economist at Mesirow Financial, though he doubts it will do much to boost demand or output. "As a matter of fact, I am beginning to see the Fed a little bit out of bullets."

Indeed, the name of the game may indeed be continuity rather than stimulus at this point.

"I don't think there's a lot of good arguments to be made for additional bond purchases helping economic growth. I do think there's a good argument to be made that the perception that the Fed is slowing will harm growth," says Guy Lebas, chief fixed income strategist at Janney Capital Markets. "To some degree the Fed has to keep buying bonds to keep up appearances."

One goal of quantitative easing is to boost borrowing and bank lending and push long-term interest rates down. Those lower-term interest rates are supposed to, in turn, encourage investors to spend money now and boost the economy. In part due to the Fed's efforts, yields on 10-year Treasuries remain remarkably low, at just above 1.6 percent—right around the rate of inflation.

[Read: Can the Fed Unprint Money?]

But after three rounds of quantitative easing, there are many questions about its effectiveness.

"I think the problem is that whatever low interest rates can do for this economy, they should have already done it," explains Laurenti. "I don't buy into the argument that if [10-year yields] were 1.4, 1.3, 1.2 [percent], it would make such a huge difference."

Of course, there's no guarantee that QE4 is coming soon, or even at all. A fiscal-cliff-induced recession would be the most likely trigger for another round of easing, in Laurenti's opinion. If Congress does nothing and allows scheduled tax increases and spending cuts to go into effect, then, the Fed would be forced to do something, he says—even if that something has minimal effects.

[Read: Lawmakers Look To Economic Wonks On Cliff]

"I'm thinking in case of a recession they would feel the need to increase the dose, even though it's not doing much," he says. "That would be the perception of easing, even if there's no transmission to the real side of the economy."

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