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October 23, 2012

Alan Levenson Alan Levenson, T. Rowe Price Chief Economist

The economic recovery has proceeded slowly since the recession ended in 2009, but the recent Fed decision to provide sustained monetary stimulus could provide a modest tailwind to both the expansion and the jobs market. In a recent interview, Alan Levenson, chief economist for T. Rowe Price, discusses the policy decision and its various implications for the economy and the financial markets.

Fed's Latest QE3

The Federal Reserve Bank announced in September that it plans to engage in its third round of "quantitative easing." This time, the stimulus plan is different in that it has no set dollar amount. The U.S. central bank plans to purchase $40 billion worth of bonds—for now, mortgage-backed securities—every month for as long as it is necessary to improve the job market.

In the interview, Levenson notes that the voting members of the Federal Reserve are most likely frustrated with the results of previous quantitative easing efforts and want to provide a more sustained stimulus. Injecting money into the economy on a regular basis instead of executing a short-term plan will likely make it easier for employers to make hiring decisions since they will have less uncertainty.

Impact on Investors

When the latest round of quantitative easing was announced, various assets rallied, including stocks and gold. This same increase in values happened in 2008 when the first round of easing was announced by the Fed. While this is positive for many investors, one practical concern raised by increasing the money supply is the potential for inflation. A bout of high inflation is not an inevitable consequence of the Fed and other central bank actions, Levenson believes, but the chances of it have increased.

One group that is not benefiting from the environment of sustained stimulus and low interest rates is savers. The Federal Reserve has extended its predicted timeline for low interest rates into at least mid- 2015, and this policy will keep the downward pressure on interest rates received by people who put their money in savings accounts.

Government Spending and the Economy

Levenson notes that one issue that is front and center in the current election is the growing national debt, which is fed by the deficits that are generated every year by the federal government. When the current fiscal year ended on September 30, 2012, it carried an estimated $1.1 trillion deficit, bringing the national debt of the United States to 73% of gross domestic product (GDP).

Entitlement spending is the single greatest problem in this situation. Levenson stated that the projected increase in government responsibilities such as Medicare and Social Security will likely exacerbate existing deficits unless fiscal policy is changed. Levenson predicts that lawmakers will begin reducing these deficits within the next year as a consensus grows that we need to take action.

Levenson predicts that the economic recovery will continue to be gradual, with growth likely to be slightly higher than 2% in 2013, after averaging 1.5% in 2012 and 2% in 2011. He is cautiously optimistic about the state of the economy, but the decisions that Washington makes in the near future will be crucial.

The views are as of October 4, 2012 and may have changed since that time. This information is provided for informational purposes only and is not intended to reflect a current or past recommendation, or investment advice of any kind. Opinions and commentary do not take into account the investment objectives or financial situation of any particular investor or class of investor. Investors will need to consider their own circumstances before making an investment decision.

Copyright 2014, T. Rowe Price Investment Services, Inc., Distributor. All rights reserved.