Qe3 Analysis

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, experts question how exactly lowering interest rates further could boost the economy.
As an advocate for monetary stimulus from Fed, I agree with the third round of quantitative easing will help keep the economy growing despite headwinds from Europe’s debts crisis. From my point of view, the risk of more inflation is mitigated by banks’ policy.
During the Fed’s aggressive easing of monetary policy, the Fed added about $2 trillion of assets to its balance sheet and an equal amount to its liabilities, mainly the reserve deposits of banks. Normally, such an expansion of bank reserves would trigger additional bank lending and investing. However, given the stress on banks during and after crisis, they have held onto most of those new reserves as “excess reserves,” thus truncating the money-creation process. The money not spent cannot cause inflation and a weakening of the dollar. If the banks are under such duress that they want to hold extra liquidity and capital for precautionary purposes, then, if the Fed weren’t providing it, they would try to generate it themselves through shrinking of other assets, that is, reducing lending and investing.
The index of 500 large U.S. companies capped a four-year rally Thursday, recouping all of its losses from the 2008 global financial crisis. The milestone underscored investors' enthusiasm over the increasingly buoyant U.S. economy. However, if the Fed stops purchasing, it will unsettle investors whose confidence had been returning causing the vulnerable stock market to decline, then, further shake the labor market. Also, thanks to the QE3, the lower level of interest rate will let people willing to put more money into the economy, causing the economic boom for the United States. I believe the recovering of the economy will help decline the unemployment rate sooner or late as the company expansion will create more jobs. Therefore, as long as the inflation rate is stay below 2.5 percent, Fed should continue with QE until the unemployment rate falls significantly.