According to a recent Reuters poll, barely a quarter of Americans know what quantitative easing is.
After months of speculation, the Federal Open Market Committee announced that it would not, as many expected/feared/anticipated, not to taper quantitative easing. In the weeks and months prior to the announcement, the markets had turned on investor guesstimation on when or if the Fed would taper its third round of QE.
What is quantitative easing? Is it:
A. A computer-assisted program that the Fed uses to manipulate the dollar
B. Part of the Dodd-Frank Wall Street reform legislation enacted following the financial crisis
C. A way the Fed makes it easier for commercial banks to borrow money from the Fed and relend it to consumers
D. When the Fed repeatedly lowers the official interest rate
E. When the Fed buys bonds in order to push down interest rates and boost the economy
If you answered “E,” congratulations. You belong to a select fraternity. According to a recent Reuters poll, barely a quarter of Americans know what quantitative easing is.
For the remaining 75 percent, the most recent stimulus strategy, called QE3, is the Fed’s policy of buying $85 billion of bonds monthly, a strategy designed to pump more money into the economy and keep interest rates low to encourage people to invest in businesses and buy homes.
In its statement announcing that QE would not be tapered at this time, the FOMC noted “The Committee sees the downside risks to the outlook for the economy and the labor market as having diminished, on net, since last fall, but the tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and labor market.”
As goes the economy, so goes QE: if it improves, the Fed projects it will slow down its bond buying, but if it regresses, it will recommit.
QE has its champions and naysayers. While lower interest rates offer a shot-in-the-arm boost, they also mean lower returns on investments. Some analysts note that emerging markets, with higher interest rates and the prospect of better returns, may be a more attractive investment than the United States. The jury is also out on QE’s effect on the economy.
With QE3 remaining in place for now, what should the average American do to take advantage? Dan Capinger of Daily Finance recommends checking in to refinancing as mortgage rates will resume an upward trend once QE3 is eventually tapered. “Interest rates at or near record low levels made homes more affordable and allowed many homeowners to cut their monthly payments by refinancing existing mortgages at lower rates,” he writes. “Temporarily cheaper mortgages make refinancing an option again for some of those who didn't act earlier.”
He also recommends investors gird themselves for ups and downs in the market.
“In future Fed meetings, the same issues -- whether, when, and how much to cut back on stimulus programs -- will keep coming up. Investors will get edgy about the possible impacts of Fed policy changes on their portfolios, and that will inevitably cause turbulence in the stock market,” he said.
Donald Liebenson writes news and features for Millionaire Corner. He has been published in the Chicago Tribune, The Chicago Sun-Times, The Los Angeles Times, Fiscal Times, Entertainment Weekly, Huffington Post, and other outlets. He has also served as a marketing writer for Chicago-based Questar Entertainment and distributor Baker & Taylor.
A graduate of the University of Southern California, he is married with a college-age son. He also writes extensively about entertainment.