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What is QE3?

By on September 18, 2012 in Money

What is QE3?The Federal Reserve with Ben Bernanke at the helm just announced what is being termed “QE3” to help support and encourage the American economy. But what exactly is QE3 and what kind of real impact will it have on your daily life?

What is Quantitative Easing?

Quantitative easing is an economic and monetary policy tactic used by the central banks of countries around the world to inject additional money into the money supply. Quantitative easing, known as QE, is used usually after more “normal” methods of increasing the money supply have been used and found ineffective.

With more conventional monetary policy methods, a central bank like the Federal Reserve might purchased government bonds with newly created money in order to stabilize interest rates at a specific level.

With quantitative easing the central bank is still injecting additional money into the money supply, but instead of buying government bonds the money is used to purchase financial assets from financial institutions. These financial assets are usually loans like mortgages or commercial paper. Through purchasing these assets the central bank increases the price of that type of asset which in turn lowers the overall yield. The impact is usually the same: lower or stable interest rates where the central bank wants them.

What is the Economic Goal of QE3?

QE3 is the third round of quantitative easing under Bernanke at the Federal Reserve. The first two rounds helped push mortgage rates and Treasury yields very low, which in turn pulled down the interest rates paid on loans and saving accounts. With QE3 the Fed is looking to keep interest rates incredibly low. The tactic used with QE3 is to buy mortgage-backed securities to the tune of $40 billion of purchases per month indefinitely. As mentioned above this will raise the price of these financial assets, which in turn will lower the overall yield, and lead to lower mortgage rates, which in turn leads to more home buying and refinancing. These are all seen as being good for the American economy.

Or at least that is the goal.

Will QE3 Work?

No one really knows whether any type of quantitative easing will really work. To know whether or not it is working, you have to compare to the goal. Interest rates for mortgages are already at historic lows. After the announcement of QE3 not much changed in the mortgage rate market. Were some in the market anticipating QE3 and the good news was already “baked in”? No one really knows.

Additionally, if the economy improves (unemployment goes down, wages increase, and so forth) then home buying will also increase. Will it be a direct result to QE3? It’s hard to tell.

Risks of QE3

The biggest risk any central bank takes when it increases the money supply is inflation. By increasing the money supply by $40 billion every single month until certain economic goals, the Federal Reserve risks making each dollar you currently have go slightly down in value with each month that goes by due to inflation. Right now inflation is not a serious concern considering the economic problems we’re having, but unexpected inflation could rack further havoc on a slowly recovering economy.

About the Author

About the Author: Husband, father, tech junkie and sports enthusiast. I have owned and operated as well as a number of others sites since 2005. .


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