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By Jason Stipp and Jeremy Glaser | 09-14-2012 06:00 AM

Taking Action

Policymakers and corporate leaders appeared to take decisive steps this week, but are they moving in the right direction?

Jason Stipp: I'm Jason Stipp for Morningstar, and welcome to The Friday Five. Policymakers and corporate leaders took action this week, but to what end?

I'm here today with Morningstar markets editor Jeremy Glaser. He's going to give us the rundown.

Jeremy, thanks for joining me.

Jeremy Glaser: Jason, always a pleasure.

Stipp: What do you have for The Friday Five this week?

Glaser: Well, this week, we're going to talk about the Federal Reserve, two problems in Europe, China, EADS & BAE, and finally Chesapeake.

Stipp: We have to start with the biggest action, Bernanke and the Fed released a statement on Thursday about the actions they're going to take going forward, the so-called QE3. The markets initially at least were very happy about the results. What's your take, and is it going to get the conclusion that the Fed hopes?

Glaser: It's certainly too early to tell if this is really going to have all of the effects that Ben Bernanke hopes that it's going to, but I think it's a good idea to take a little closer look at exactly what they're proposing and what they're going to start doing.

The Fed is going to buy $40 billion of mortgage-backed securities every single month. I think there's three interesting things that are happening here that may be a little bit different from other programs.

The first is that this is open-ended, and this is probably one of the most important things about this program. It's not just, we're going to spend $600 billion, say, and then when that's over, it's done. They're going to keep doing this until employment looks a little bit better, until the economy looks like it's back on its feet, and that open-ended commitment to keep buying bonds is meant as a signal to the market that the Fed is really going to be there, no matter what, that they're going keep doing this until the economy totally heals, even if that is three, four, five years down the road. They want to make it clear that they're going to be there and they're going to keep buying these bonds.

The second one is that, this is not Treasuries that they're buying. Before, they were buying Treasury bonds and helping keep those rates low, but those rates are already extremely low, and I think they saw that maybe the mortgage bond market was an area that they could have more impact, and would be able to get those rates to come down, which could lead to lower mortgage rates, which they're hoping will lead to a better housing market, which they're hoping will then gain employment. Certainly, that transmission mechanism may be a little bit clearer there for getting to employment.

I think that brings us to that third big thing here, which is that this really is focused on employment. I think a lot of people forget that the Fed really has a dual mandate. They have to keep inflation under control, and they also have to keep employment very high. And sometimes those work at opposite ends of each other. But I think here they're really focusing on that employment aspect, where it's open-ended, but they said they're going to be looking at employment to see when to stop it. By targeting housing, again, they're looking directly at employment, and it's definitely an area that they seem to be focusing more and more on when they talk about how they're evaluating the economy, is how many people are getting back to work, and how do we bring that unemployment rate back to that normalized level and not to these really elevated levels that we see right now.

So, the Fed, this program, is going to be helpful, I think, in a lot of ways, but they can't do it on their own. We still have issues like the fiscal cliff; we still have issues in Europe, potentially in emerging markets that could still derail the recovery, and that could still keep things moving very slowly.

But I think the Fed is trying to make a bold statement here that they're going to stand behind the economy, that they're going to keep buying bonds until the cows come home essentially, and we'll have to see if it's enough and if it gives the space for the rest of the economy to continue to grow.

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