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August 22, 2012

Federal Reserve: More quantitative easing “fairly soon” if economy doesn’t pick up

by Rylan Stewart

Minutes from the most recent Federal Reserve meeting show that another round of quantitative easing (QE3) could soon be in order if the economy doesn’t pick up.

The monetary stimulus plan would call for asset purchases to inject money into the economy, thus bringing down interest rates and giving investment incentive. QE3 would be a more radical step than the recent round of “Operation Twist”, in which the Fed swapped short-term Treasuries for longer-term Treasuries.

The possibility of QE3 has been on talked about for some time now with the Fed resisting the step, but it now seems to be earnestly on the table. The Fed has expressed dissatisfaction with the economy, and will enact the policy “fairly soon” unless the outlook changes significantly. Despite mixed economic news, including improvements on jobs and retail sales, the Fed is concerned about sluggish GDP growth, exposure to the European debt problem, and the impending “fiscal cliff” debates.

In response to the news, stocks fell off before recovering to just below closing levels. The 10-year U.S. Treasury yield, which tracks the 30-year fixed mortgage rate, fell by half a basis point just after the announcement, signaling that investors were moving to the safety of the bond market. Expect a slight improvement in mortgage rates to follow.

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