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Can QE3 fix housing?

By Judy Martel · Bankrate.com
Tuesday, January 17, 2012
Posted: 10 am ET

The Federal Reserve may decide at its meeting next week to give another boost to the housing market with a third round of quantitative easing.

Back in 2008, the Fed announced QE1 to keep interest rates low, which involved buying mortgage-backed securities and mortgage debt. In 2009, the program was expanded to include government debt. Then in 2010, QE2 was announced. Experts mostly agree that while QE1 was successful, the reviews are mixed about QE2.

The Fed already is in the midst of Operation Twist to roll over the short-term bond purchases as they mature into long-term bonds with the goal of bringing down long-term interest rates. The Fed has also committed to keeping short-term rates at near zero through next year.

So the question is, will QE3 work? Several members of the Federal Open Market Committee have said economic growth continues to look weak and because inflation is still moderate, more easing is appropriate. The third round will likely concentrate on the Fed buying more mortgage-backed securities and many expect it to begin after Operation Twist ends in June.

In most economic recoveries, housing construction has helped pull us out, but that hasn't happened yet, and construction levels are less than half what they were before the recession.

Here's what Greg McBride, CFA and senior financial analyst at Bankrate, has to say.

While I see QE3 as inevitable, barring an unforeseen surge in economic activity, I doubt we'll see it right away. First, the economic data has been better of late and that removes some of the sense of urgency to do so right away. Second, despite the fact that the Fed is independent, there is significant political opposition to further stimulus. But given the slow, plodding economic growth, we'll eventually see the Fed enact some form of QE3. Whether or not it does any good is debatable. Mortgage rates are already at record lows, and that alone is not enough to jump-start home sales or put a floor under home prices. People won’t feel confident buying homes until they're more secure in their jobs and on financially secure footing.

Do you think QE3 would benefit the economy and boost the housing recovery?

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