Friday, September 14, 2012

Welcome to QE3

Yesterday the Fed announced it would buy $40b of mortgage-backed securities each month and committed to keep interest rates low through mid-2015.  The idea is to reduce the supply of these securities and thereby push investment funds into other outlets such as the stock market, real estate, and corporate bonds.  The hope is that long-term interest rates will fall, the private sector will have more liquidity, the stock market will rise and good times will be here again. 

Will it work?  WSJ reports that economists are split: of 51 surveyed, 28 said that more quantitative easing will not help and 17 said that it would.  Not exactly a ringing endorsement, and not surprising either because (1) banks continue to hold unprecedented levels of excess reserves and (2) interest rates are already at historic lows.  People may want to make big-ticket purchases or re-finance their houses, but with a large share of consumers still carrying high debt burdens, their key issue will be qualifying for any loan, regardless of interest rates. 

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