QE 3 is short for Quantitative Easing, Round #3. This is a policy where the Fed buys up debt instruments or assets in an effort to push down long-term interest rates. The Fed’s hope is that lower long-term rates will stimulate the economy by giving consumers and businesses an incentive to borrow and invest more (b/c it is cheaper to borrow).
Often, the Fed’s actions do not move rates as much as hoped, but QE 3 looks to be effective b/c the Fed has committed buy up mortgages (mortgage backed securities) to the tune of $40 billion per month. This represents about 25% to 30% of overall mortgage volume; this increase in demand will bring down rates.
The Fed has committed to QE 3 indefinitely too, so rates are expected to remain lower for a long time. This will offset the “G Fee” increases discussed earlier this week.
There are events that could push rates up, despite QE 3; these events include consistently strong economic reports or signs of inflation. These things are not on the short term horizon, however.
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