Fed’s stimulus plan to lift stock prices

The Federal Reserve’s new economic stimulus plan involves printing vast sums of money to help people buy homes, but over the next year the programme could do more to boost the economy by lifting stock prices.

The Fed said last week it would buy $40bn (€30bn) every month in mortgage backed securities until the labour market improves substantially.

The programme, known as “QE3”, will likely lower mortgage interest rates and also help some people refinance home loans.

Although the Fed’s buying plan represented an unprecedented bid to get the US economy growing more quickly, many economists are sceptical it will have a big impact on a housing market which is held back to a large degree by tight lending standards by banks. Mortgage rates are already near record lows, they point out.

But it is possible QE3 will help the economy in other ways. By giving an open-ended vow to pour money into the market for mortgage-backed securities, the Fed will likely keep on supporting stocks and other asset classes by keeping returns low.

Investors in search of yield will have more reason to buy equities and to lend money to companies.

Peter Hooper, an economist at Deutsche Bank in New York, thinks the programme will add at least a half a percentage point to gross domestic product over the next year, largely by boosting stock prices and making people feel more wealthy.

Last Thursday, Fed Chairman Ben Bernanke said policymakers hope QE3 will help people buy homes, but he acknowledged the aim is also to boost asset prices like stocks and to make families and businesses more confident in the future of the economy.