MARKET WATCH : What Does Additional Quantitative Easing Mean?
First off, “quantitative easing” is simply a euphemism for injecting more money into the economy, which the Federal Reserve does when it buys government bonds or other credit instruments with money it creates. This new money, in turn, is deposited with banks.
In the past three years, we’ve seen two major injections of money, known as QE1 and QE2, which wrapped up June 30 with the injection of $600 billion in new money into the economy. With QE1, mortgage rates dropped. With the second go-around, QE2, mortgage rates actually increased.
So how will QE3, if there is one, impact the credit market? We’ll venture a guess. Given the slowing economy and unrest in Europe , much of the money could immediately flow into Treasury investments, which are haven investments. Therefore, mortgage rates could fall. A little further out, though, we see rates rising, because price-inflation fears will rise and lenders will eventually demand higher rates to compensate for lost purchasing power.
In short, we see a temporary drop in mortgage rates followed by a rise in mortgage rates. Of course, there are many extenuating factors – European Union debt problems, U.S. default, a slowing economy – to upset our prediction, so we wouldn’t put any money on it. Then again, we wouldn’t put any money on any other prediction either.
