What is Quantitative Easing?

Quantitative Easing is the concept of the Fed becoming a buyer of Treasuries and Bonds to try and stimulate the economy. Oftentimes, the Fed does Quantitative Easing when they are hoping to (1) create inflation and avoid a deflationary economy, (2) lower the unemployment rate, and (3) boost Stock prices. Why did the Fed announce QE3? With our economy still struggling (especially our housing and labor markets) and inflation appearing tame, QE3 was widely expected. But what caught the markets by surprise was the aggressiveness of the Fed's action. Over the next several months, at the very least the Fed will be buying Mortgage Bonds at an annual rate of nearly $800 Billion. The Fed also noted that QE3 will continue until there is a self-sustainable recovery in our economy, as long as inflation doesn’t rise too high or quickly. Supporting the Fed's action was August’s tame inflation data at the consumer level. It is important to note that the Producer Price Index (PPI), which measures inflation at the wholesale level, rose to three year highs in August due to the spike in fuel costs and food prices. Rest assured, the Fed will be watching inflation levels carefully over the coming months. What does QE3 mean for home loan rates? The Fed is buying such large amounts of Mortgage Bonds each month to keep home loan rates (which are tied to Mortgage Bonds) near record lows, which they hope will help strengthen our housing market and economy overall. However, as the economy starts to improve and if inflation heats up, Bonds could face some selling pressure…which could impact home loan rates negatively as a result. The bottom line is that home loan rates remain near historic lows and now is a great time to consider a home purchase or refinance. Let me know if I can answer any questions at all for you.