Impact from Third Round of Federal Reserve Quantitative Easing

The Federal Reserve made known a third round of quantitative easing Thursday afternoon. A net $40 billion a month in added purchases of mortgage-backed securities. Plus policymakers expressed an additional accommodation will continue “for a considerable time after the economic recovery strengthens.”

However the effect of a large, unrestricted QE3 is not very clear. The desired outcome is that added Federal action will lower interest rates, even thought they are currently at rock-bottom levels. Treasury yields certainly have moved a bit higher after the Feds announcement.

Stocks have come around with major averages up around 1% in mid-afternoon trading. Wall Street was quite pleased, but what about Main Street? Average Americans can expect to experience higher gasoline prices. Quantitative easing also forces upward commodity prices, by increasing demand for financial assets and by reducing the strength of the dollar.

Crude oil prices have been drifting upward and were up $1 to nearly $98 a barrel in mid-afternoon trade. That quickly filtered down to gasoline prices at the pump. Gas prices went back to $3.847 a gallon last week, the highest since April. They have gone up for 10 straight weeks in part on expectation that QE3 was arriving. Gas prices once again could pressure the $4 level which is already well over that amount in California. This is even without a major supply issue or anticipated disruptions around the world.

Food prices may go higher because of oil and gas prices, by encouraging more corn burning to produce ethanol, as IBD’s Jed Graham recently noted. Corn prices are close to record highs because of this summer’s historic drought.

The producer price index soared up 1.7% in August, the largest bump in three years. on higher food and energy costs. Wholesale level gasoline prices exploded 13.6% while food costs rose 0.9%, the most in nine months. With job growth and wage gains weakened, higher food and gas prices will effect consumers’ buying power on everything else. That will offset much of the modest QE3 benefits.