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By Timothy Strauts | 10-04-2012 11:00 AM

Volpert: Diminishing Returns From Fed Action

Ken Volpert, head of Vanguard's Taxable Bond Group argues that the Fed's earlier stimulus efforts were much more effective than "QE3" is going to be, and also discusses why we're likely to go over the fiscal cliff--for a little while.

Tim Strauts: I'm Tim Strauts. Today I'm here with Ken Volpert, head of Vanguard's Taxable Bond Group. We're here at the Morningstar ETF Invest Conference.

Thanks for being here, Ken.

Ken Volpert: You're welcome, Tim.

Strauts: So, Ken, what is your opinion of the Federal Reserve's latest new moves with QE3?

Volpert: So, the QE3 is really related to a continued slow economy--very poor employment growth and just ongoing challenges to get this economy moving. And QE3 is really an attempt to continue to keep asset prices higher, create a little bit of a wealth effect, maybe that would result in more consumer spending and hopefully generate a little bit more growth in the economy.

I think every QE that goes on actually is less effective. So, I'm not sure how much more will be generated out of QE3, compared to the first and second QE in the Twist, which I think were much more effective than this is going to be.

Strauts: Some people are calling this QE Infinity, because it's an open-end bond buying program. Now why do you think Bernanke choose to do an open-ended program?

Volpert: Well, I think, he did a couple of things in this announcement. Not only did he make it open-ended and go after mortgages, to try keep the housing market growing and a little bit stronger, but he also really emphasized that he's not going to take it away very quickly. Even if the economy starts gaining employment, it starts improving, he’s going to continue to do QE beyond what I think investors generally thought.

So, QE Infinity is just probably about right, [in the sense] that it's going to go on for a very long time. And I think that kind of changed a little bit investors' take on how long rates will stay low, and it seems to be pushing further out any kind of rate increase.

Strauts: Now, the fiscal cliff is coming up here, with automatic tax increases across the board, and it seems to be the general consensus that if that actually happens that we're going to move into a recession pretty quickly. Do you have any thoughts on what’s going to happen with the fiscal cliff?

Volpert: We do think that we're going to go over the cliff for a little while. It does seem like Congress and the president can't come to an agreement, and so it does feel like until they get to a crisis point, they can't get anything done. So, it wouldn't surprise us at all that we actually go into the New Year still without a deal. And there is also some thought that the fact that we get into the New Year, then taxes go up, they didn't do it, and then if they do put in some cuts that it looks like they actually cut taxes.

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