Federal Reserve Decides Not to "Pause" QE3 - As it turns out, there was no need to panic after all! Leaders at the Federal Reserve announced last week that they plan to continue their efforts to jump start the economy with their Quantitative Easing program. The announcement comes less than a month after there was speculation that the central bank was planning on “pausing” those efforts as early as late 2013.
Last year, the Fed began buying $85 million worth of mortgage-backed securities each month, in an effort to keep mortgage rates low. The Federal Reserve calls the plan Quantitative Easing, and we're currently in the third cycle of these efforts, so the most recent program is referred to as “QE3”. At the end of 2012, leaders at the Fed announced they would continue QE3 until the national unemployment rate drops below 6.5% and/or the inflation rate rises above 2.5%. At that time, analysts estimated the economy will meet those barometers in 2015, so consumers, lenders, and even government officials were expecting QE3 to continue until then.
Or, at least that was the case until minutes from the December meeting of the Federal Reserve showed that some leaders hoped to “pause” QE3 as early as late this year. During that meeting, St. Louis Federal Reserve president James Bullard said he anticipated that the unemployment rate would drop below 7% by the end of 2013, so he expressed his desire to stop the QE3 plan at that time. The speculation alone caused mortgage rates to rise.
But during their latest meeting last week, Federal Reserve leaders decided to continue their economic stimulus efforts, and announced in a statement that they're keeping their promise to purchase the mortgage-backed securities each month until the unemployment rate drops below 6.5%. The statement was approved by an 11-1 vote, with only Kansas City Federal Reserve president Esther George objecting.
Despite the speculation a few weeks ago, the announcement was widely expected – especially after the U.S. Commerce Department announced last week that the Gross Domestic Product (GDP) shrank during the fourth quarter of 2012, its first decline since 2009.
Stock markets showed little movement in reaction to the GDP report, most likely because it was widely expected that the Fed would continue to provide stimulus until the economy fully recovers. After the Fed confirmed its commitment to QE3, the stock market experienced only a slight drop-off after the Fed's statement was released. Mortgage rates also remained low after the announcement, but will eventually rise simply because higher rates are indicative of a healthy economy. For now, though, mortgage rates remain near the record lows that were set last year, and are still a fraction of where they were during the housing boom of 2006 and 2007. As the economy continues to improve, those rates will slowly but steadily inch slightly higher – but should still remain relatively low and enticing to prospective homebuyers as long as QE3 is in place.
After the unemployment rate and inflation rate goals are met, QE3 will be lifted, but by then, Federal Reserve leaders expect the economy to be strong enough to handle higher interest rates.
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