The Federal Reserve is busy looking at what to do next to try to keep the economic renewal on track, as the central bank meets for the last time this year. The Fed also understands its impact will be hindered by the ongoing battle in Congress regarding the pending fiscal cliff.
The Federal Reserve is speculated to continue its third quantitative easing (QE3) program of buying mortgage bonds each month. The effect will see the Fed increase its holdings of mortgage bonds to nearly $4.0 trillion, according to a Bloomberg survey. (Source: “Fed Seen Pumping Up Assets to $4 Trillion in New Buying,” Yahoo! Finance via Bloomberg, December 11, 2012.)
The bond buying has helped to ease financing rates and drive the housing market higher.
The Fed has spent $40.0 billion a month to buy mortgage-backed securities and, in theory, lower the financing rates. The yield on the 10-year Treasury stands at 1.6% versus 1.8% prior to the establishment of QE3—so it’s working.
For the Fed, as the QE3 works its way through the system, job creation is expected to be a major benefactor.
The Federal Reserve recognizes that the jobs market continues to be problematic and needs to be addressed, despite the unemployment rate falling to 7.7% in November. There are still over 21 million Americans looking for work.
To date, the super-low interest rates at between zero and a quarter of a percent have helped to prevent the country from falling into the abyss. If not for the low rates, the carrying cost of the $16.0 trillion in national debt would be suffocating and making the situation worse, which is why there’s the fiscal cliff. Something needs to be done during President Obama’s second term.
As I said when QE3 was first announced, the plan put forth by the Fed should help in theory; but this is the real world, and there are other variables that come into play that could hamper the Federal Reserve’s plan.
“Strains in global financial markets continue to pose significant downside risks to the economic outlook,” says the Federal Reserve. This shouldn’t be a surprise. Europe and the eurozone are in a financial mess, and China and Asia are on fragile ground. In China, we are seeing multinational companies report slowing in China as consumers there cut spending.
So while I believe the Federal Reserve was correct in launching QE3, I question how effective it will be and feel the situation is far worse than they want you to know, given the massive debt load and the fragile financial situation of many states.
The bottom line is: the Federal Reserve will continue to print money to buy bonds. The question is: what will happen when the ink runs out?