In the statement released after its November meeting, the Federal Reserve announced that it will purchase a further $600 Billion of longer-term Treasury securities by the end of the second quarter of 2011, in what is known as another round of Quantitative Easing (or QE2).
To help you understand what this means to the economy and to you, let’s break down the details, starting with what Quantitative Easing is and the reasons behind this move by the Fed.
What is Quantitative Easing?
Quantitative Easing is the concept of the Fed becoming a heavy buyer of Treasuries and Bonds. This is done to artificially cause those security prices to move higher under the increased demand. That demand should, in turn, cause interest rates to move lower with the hope of stimulating the economy.
What other impacts might it have?
QE2 will almost assuredly hurt the US Dollar, which helps make US exports more affordable abroad as well as make imports appear relatively more expensive. Such a shift helps large multi-national companies, which have a large influence on the economy and the major Stock market indices.
Of course, the Fed can’t outright say it is trying to weaken the currency. After all, haven’t many members of Congress and the Administration been bashing China for currency manipulation?
But the point is, even if QE2 doesn’t have a direct impact, the drop in currency value can be very beneficial to corporations and Stocks.
How can QE2 impact home loan rates?
While Stocks should benefit from another round of Quantitative Easing, Bonds may have a different reaction. And that brings us to the heart of what you need to know: What does QE2 mean to Bonds and home loan rates?
With another round of Quantitative Easing, Bond prices should initially improve because QE2 includes large Bond purchases.
But…the key word is “initially.” That’s because, even if Bonds show signs of initially improving, the eventual softening of the Dollar, rising commodity prices, and rise in Stock prices could become a drag on Bonds, which would negatively impact home loan rates.
The bottom line is, QE2 and a weaker US Dollar may make our exports more attractive to foreign buyers, but it may ultimately drive rates higher. That’s an important point to consider if you’re thinking about refinancing or purchasing a new home. The reality is, home loan rates are still near historic lows, but won’t be forever.