The Fed’s announcement to expand the asset purchase program with an additional $40 billion in mortgage-backed securities per month was a fairly aggressive step, particularly given that we’re less than two months away from a presidential election.
This move, coupled with the extension until mid-2015 of the guidance to hold the Fed Funds rate between zero and .25%, suggests the Fed continues to be extremely concerned with weakness in the labor market.
Unfortunately, this third round of quantitative easing (QE3) won’t be a particularly effective parachute if the US economy goes over the fiscal cliff. While the Fed’s announcement inspired a market rally driven by investors’ increased tolerance for risk, it’s unclear clear whether QE3 will change much in the long run. Other than providing additional liquidity to an already flooded banking system, the policy will likely have little impact on the underlying economy.
The prospect of unlimited buying of mortgage-backed securities will help keep mortgage rates low for a long time, but they were already low. In July, a conventional 30-year mortgage could be had for 3.75%. It’s unclear whether a potential 50 basis points reduction in mortgage rates will spur a housing renaissance.