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The Fed's Quantitative Easing

 
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PostPosted: Wed Nov 26, 2008 10:13 pm    Post subject: The Fed's Quantitative Easing Reply with quote

From Wikipedia:

"Quantitative easing was a tool of monetary policy that the Bank of Japan used to fight deflation in the early 2000s.

The BOJ had been maintaining short-term interest rates at close to their minimum attainable zero values since 1999. More recently, the BOJ has also been flooding commercial banks with excess liquidity to promote private lending, leaving commercial banks with large stocks of excess reserves, and therefore little risk of a liquidity shortage.[1]

The BOJ accomplished this by buying much more government bonds than would be required to set the interest rate to zero. It also bought asset-backed securities, equities and extended the terms of its commercial paper purchasing operation."

Article (Nov 26th, 2008):

Financial markets notched up another historic milestone on Wednesday as the yield on 10-year U.S. Treasury debt fell below 3% for the first time in 50 years (since March 1956). The decline in yields – to a low of 2.98% – comes in response to unconventional policy measures taken by the US Federal Reserve this week aimed at pushing short-term and long-term interest rates lower. This so-called “quantitative easing” is a strategy central banks use to fight deflation, the dreaded combination of declining growth and falling asset prices.

“It is astonishing that yields are so low,” said Michael Chang, interest rate strategist at Credit Suisse. “The current environment is not like anything we’ve seen before. The Fed’s being very aggressive in quantitative easing, and the fall in yields is the result.”

On Tuesday, the Fed said it would buy $600 billion of mortgage bonds issued or guaranteed by government agencies such as Fannie Mae and Freddie Mac. This pushed mortgage rates sharply lower. The lower rates threaten to trigger a wave of refinancing of mortgages, the prospect of which in turn pushes investors to hedge that risk by buying 10-year Treasury debt, a benchmark for many mortgage rates.

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30-year mortgage rate falls to 5 1/2%. Three-month Treasury yield almost zero, i.e. 0.01%. 10-year bond yield 3%, and 30-year bond yield 3 1/2% (near or at all-time lows).

Reuters | 26 Nov 2008

Average 30-year home loan rates fell to 5-1/2 percent on Tuesday after the government lifeline was announced, according to Bankrate.

Refinancing should increase, freeing cash for consumers to spend and bolster an economy widely seen deeply in recession.

"Prices have been coming down but mortgage rates really haven't," he added.

"Well now, you've got both oars rowing in the same direction for you as a home buyer. This, over time, is going to get people back in the market, get people a little more willing to take the plunge into homeownership," he said.

Median home price continues to fall; $183,000:

http://www.bloomberg.com/apps/quote?ticker=ETSLMP%3AIND

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Negative equity:

June 5, 2008

"One out of every three homeowners own their properties free and clear, with no mortgage at all.

At the end of March, nearly 8.5 million homeowners had negative or no equity in their homes, representing more than 16 percent of all homeowners with a mortgage (at the end of March, the median home price was slightly under $200,000).

The report also showed that Americans’ total net worth dropped to $55.97 trillion in the first quarter from $57.67 trillion."

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THE WASHINGTON POST • November 26, 2008

Discounts abound

Where you have empty seats, you have discounts, says Rick Seaney, chief executive of FareCompare.com, which allows travelers to compare prices among Web sites. To fill planes, for instance, Southwest is offering $87 one-way flights between Baltimore and Chicago in early December.

Delta has a long list of one-way specials priced between $59 and $199. Tickets have to be purchased by Saturday for travel through Jan. 5.

The specials carry three- or seven-day advanced purchase requirements, less than the two-week period airlines typically demand for low-priced seats.

American Airlines also is cutting prices.

American has one-way tickets between Washington and Miami for $49 and one-way tickets to Los Angeles for $109.

American's winter travel fare period runs Dec. 2 through Feb. 26. Tickets must be booked by Dec. 1.
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