Beyond the straightforward mechanics of QE3 (i.e., the Treasury and MBS purchases), the Fed’s impact on expectations is key. The guidance indicated that support would remain in place until the economy is well in their clear. By aggressively pushing on bond yields, and more importantly, promising to maintain that effort, Bernanke and Co. definitely had an impact on the markets.
I would characterize the stance of monetary policy as very loose compared to what it would be in a normal economy, but close to the appropriate equilibrium rate given the actual economic environment, even before accounting for the likelihood of premature fiscal tightening in 2013.
QE has the effect of lowering borrowing costs (for mortgages and corporate borrowers, as well as the government), raising inflation expectations, and weakening the dollar (which is beneficial to a large, open economy such as the U.S., despite the omission and denial of such intentions), but does not lower returns on cash and savings, since rates are already zero (though in real terms, because inflation is boosted, it still has some of the same effect). In this sense, QE is just “ordinary monetary policy.” In terms of the real economy, these effects are positive but minor.
The financial effects are more important, mainly because expected inflation and USD depreciation is increased, but without increasing nominal interest rates. Companies’ cash flows in the future are thus increased; the present value of those cashflows is also enhanced because the discount rate is not higher, boosting asset prices. And to the extent that the “risk premium” is decreased, this means a further boost. Conditions are already favorable for corporate credit, and QE3 made the prospects even better.
To whom will the bulk of these benefits accrue? This should be obvious: the holders of stocks, bonds and other securities. The top 1%, who hold 60% of financial assets (according to a study by Wolff of the Levy Institute at Bard College), will be happiest; mortgage holders will be helped and might get a few basis points lower on their next refi. This assertion concurs with the Bank of England study of its large-scale asset purchase programs (LSAPs), which conclude that Main Street will have to wait for a trickle-down from Wall Street. Fingers crossed!