Qe3 Analysis

Topics: Monetary policy, Inflation, Central bank Pages: 2 (667 words) Published: March 31, 2013
During 2012, the already weak recovery from the recession weakened further. At the same time, inflation rate remained close to Fed’s target rate of 2 percent. The Fed has dual mandate from Congress to strive for both low inflation and low unemployment. It was meeting its low inflation rate, but unemployment remained stuck above 8 percent, after having fallen from its peak of 10 percent. Under the QE3 program, launched last September, the Federal Reserve is buying long-term Treasury and mortgage-backed securities to pump more liquidity into the economy in a way that will maintain downward pressure on long-term interest rates. The Fed hopes the lower interest rate will stimulate the economy to expand via capital new investment and specifically, to grow more jobs. An MBS is a way for smaller regional banks to lend money to its customers without worry about whether the customers have the assets to cover the loan. By selling MBS to Fed, banks are able to lend more mortgages to its customers including home buyers or business owners. As the supply of money growing, the interest rate will drop down to attract more borrowers. Treasuries are sold at auction by the Treasury Department, which sets a fixed face value and interest rate. The Fed’s purchase actually truncate the supply for the treasuries, thus it will go to the higher price above the face value, lessening the yield. Since "Treasuries represent the benchmark borrowing rate" for all bonds, lower yield on U.S. Treasury notes means lower rates on mortgages. Therefore, both types of purchases have reasonably effective in pushing down long-term interest rates. However, there are voices against Fed’s decision. Why they don’t want QE3? The main reason lies in the risk of hyper-inflation. Main Street is once again starting feel the pressure of inflation. The oil price is nearing $100 a barrel, gas price are at the highest levels and food price are also rising. Given those are the chief problems facing the economy,...
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