Is It Time to End Quantitative Easing?
Realtypin.com Author: James Paffrath
May 24, 2013
Desperate times call for desperate measures, but once conditions improve,
should you reevaluate the situation?
This article is brought to you exclusively by RealtyPin.com
That's the question that the head of one of the U.S. central banks is
asking regarding the economy, the housing market, and Quantitative Easing!
Jeffrey Lacker is the President of the Richmond Federal Reserve bank, and
during an interview with reporters last week, he said that he believes it's time
for the Fed to get out of the mortgage business.
As you may remember, leaders at the Fed announced last September that they
would begin purchasing $40 billion in mortgage-backed securities per month. The
plan is known as Quantitative Easing, and since this is the third series of such
practices, the latest attempt to give life to the economy has been nicknamed
“QE3”. The idea behind QE3 is that buying those bonds will keep interest rates
low, which should encourage people to make bigger purchases and, in turn, boost
both the struggling economy and housing market.
Twelve leaders within the Fed make up the Federal Open Market Committee
(FOMC), and they are the ones who passed the resolution to begin QE3 by a vote
of 11-1. The one member of the FOMC who voted against the idea back in
September? Lacker!
The same group met again in December 2012, and although Lacker was not
alone in voting to end QE3, the FOMC ultimately decided to continue the
bond-buying plan. In fact, they actually voted to increase their monthly
purchases of bonds from $40 billion to $85 billion. Since that vote, Federal
Reserve Chairman Ben Bernanke has insisted on many occasions that the FOMC will
continue QE3 as long as the national unemployment rate is above 6.5% and the
inflation rate remains below 2.5%. Experts originally speculated that those
thresholds would be met in mid-2015, meaning that QE3 will not only continue for
the remainder of this year, but also throughout 2014 and into the following
year.
So, what's changed?
The economy – especially job growth – is recovering quicker than many
experts had anticipated. Although the unemployment rate is still above 6.5%, it
has dropped below 8% and should continue to fall in the months to come.
So, does that mean it’s time for QE3 to come to an end? Lacker says
yes!
Throughout his tenure at the Richmond Federal Reserve bank and as a
committee member on the FOMC, Lacker has opposed the purchasing of
mortgage-backed securities, and has even been called an “inflation hawk” by some
media outlets. He says instead of continuing QE3, the Fed should reinvest the
principal from maturing mortgage bonds into the Treasury market.
However, financial analysts say that abandoning QE3 too soon could prove
harmful to an economy that is just now starting to show signs that it can stand
on its own without help from the central bank.
So, will QE3 continue until the original projected date of mid-2015?
Who knows, but right now, almost every expert says that stopping it now is
not a wise decision. While it's certainly good news that the unemployment rate
is dropping faster than anticipated, Lacker may be premature with his request to
end QE3 altogether. But, as the economy continues to improve in the months and
years to come, it will be interesting to see how many of Lacker’s fellow
committee members in the FOMC begin to agree with him about the Fed finally
getting out of the mortgage business!
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