On Thursday, the Federal Reserve announced a big party called Quantitative Easing III. Officially, they are “purchasing additional agency mortgage-backed securities at a pace of $40 billion per month.” Despite reading dozens of tweets, news articles, and blog posts, I still have no idea what that actually means.
The investors seem to love it, because the stock market is booming. The elites think it’s a free lunch, a win-win-win barrel of awesome sauce that’s going to save the economy or something. The doom-peddlers think it’s a reinflation of distorted bubbles that’s going to backfire into a terrible collapse or something.
But what does it all mean? The Fed’s announcement said it’s supposed to “put downward pressure on longer-term interest rates.” Ah, so interest rates must be going down! Interest rates have been at record lows lately, although they’ve come up a bit in the last month or so. For example, the 10-year Treasury was flirting around 1.5% but was up to 1.7%. All it’s done since the announcement is climb up to 1.87% since traders who loved the announcement switched from bonds to stocks. Ah, so interest rates must be going up! But the Fed is actually buying mortgage thingies which means “Economists believe QE3 will take [mortgage rates] lower.” Ah, so interest rates must be going down! But economist Justin Wolfers says I should refinance “now,” and I wouldn’t want to do that if rates were about to drop some more, right? Ah, so interest rates must be going up! But if they’re going up, than that makes it harder for people to afford houses, and the Fed says they’re trying to “support mortgage markets.” Ah, so interest rates must be going down!
Are you as confused as I am yet? Maybe certain kinds of rates are supposed to go down while others go up? There does seem to be a general consensus that this will lead to some sort of higher level of inflation. But I’m not really sure, and I’m getting tired of trying to figure it out. I bet Ben Bernanke is sure, though. He’s pretty smart.