QE3 to have modest impact on US economy: HSBC Sec

The US Federal Reserve has opted for a third round of quantitative easing or QE3 and global markets have reacted positively to the development. Kevin R Logan, Chief US Economist at HSBC Securities feels it will have a modest impact on economic growth in the United States and it will take time to feel its effects. He believes, over time this will have a positive impact and home buyers will see lower interest rates. Overall, economic growth prospect in the US was slightly better in 2013 than it was earlier, opined Logan.

Here is the edited transcript of the interview on CNBC-TV18.

Q: Let me start with QE3. That indeed is the burning topic. Not just the US, the world markets had been waiting for this. But now that is actually here and markets have had a bit of time to digest the news, what really happens next? To what extent is the situation likely to change or maybe even improve?

A: I think it will have a modest impact on economic growth in the United States. It would take some time for the effects to be felt in the real economy. Financial markets have already responded. We see a quick rise in stock prices and certainly the prices of mortgage-backed securities went up and consequently the interest rate for mortgages has gone down since the Federal Reserve is concentrating QE3 on mortgage-backed securities.

Over time this will have some positive impact. Home buyers will see lower interest rates. Those who have stock portfolios, who feel a little wealthier spend a bit more. Overall, there will be a modest improvement in economic growth. It won't happen immediately. It will take a little bit of time, but we probably have slightly better economic prospects now particularly for 2013 than we did before.

Q: As far as the financial markets go, market reaction essentially has been positive. We have seen that sharp shoot up, but a bit of temperance now. What kind of targets would you really set for the markets, say for the year end, for the Dow and the S&P 500?

A: I think to some extent this move by the Fed was well anticipated. We had hints from various members of the Federal Reserve prior to the action and Mr. Bernanke the chairman gave an important speech at Jackson Hole in August, in which he outlined the need for further monetary stimulus.

I think the markets were already rising in anticipation of this move by the Fed. We shouldn’t just look at one day, but look at what’s happened to the stock market over the last month or so. It has perhaps had a more positive impact than the one day event suggests. As for the rest of the year, that would depend on a number of things. We have a very important presidential and congressional election taking place in November and that will have some impact on markets and also there are still issues in Europe that have to be resolved. That will have an influence on global economic developments.

We have a lot of uncertainty at the moment. I suspect the stock market will be slightly higher towards year end, perhaps another few 2 or 3 percentage points, but I think the uncertainty that still exists is going to prevent a very sharp rise between now and the end of the year.