The pros and cons of a possible QE3
Later today, the Federal Reserve wraps up a two day policy-setting meeting. The big question is whether they’ll launch another round of “quantitative Easing” — buying up bonds to inject some money and a bit more pep into the U.S. economy.
If the Fed goes on a QE3 bond-buying spree, the committee would have to decide what bonds to buy, and how many of them to get. In the past — and this has happened twice in recent history — the Fed bought mortgage-backed securities and longer-term Treasury bonds.
Many experts agree that the Fed is likely to go with mortgage securities again this time around.
“The idea here,” explains Michael Feroli, J.P. Morgan’s chief U.S. economist, “is that if you buy more mortgage-backed securities, you’re going to push up their price, and thereby lower the interest rate.”
And by doing that, the Fed could help boost demand for housing and improve home sales, says Scott Brown, with Raymond James. Then homeowners could refinance their mortgages, to get a little more cash. “It is really going to be years before we get a full recovery,” he says, “so anything they could do to push things along would be welcome.”
Mark Zandi, chief economist with Moody’s Analytics, points out that while at one time, the Fed used the method to head off deflation, now it seems to be leaning towards this type of action if the economy isn’t gorwing fast enough to bring down unemployment.
And, notes Zandi, there are potential problems on the horizon for this plan, especially when it comes to the lending side of things. “If you lower rates and you juice up demand,” Zandi says, “it doesn’t actually mean you’re going to get more refinancing and home sales, if mortgage lenders can’t execute and do the mortgage loans.”
Zandi says lenders are already running at “full capacity” — that they’re processing a lot of loans and they raised credit standards after the housing collapse.
Ultimately, he says, bond-buying programs, are not a solution to all of our problems, but they do help. Still, Fed action doesn’t do anything to solve our fiscal problems — that’s up to the next president and Congress.
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