QE3 Rumors Continue to Fly

A little more news on the QE3 front today:

Peter Boockvar says today on Barry Ritholtz’ blog The Big Picture that Chicago Fed President Charles Evans commented in a Q&A session after a speech that a third round of quantitative easing could be in the neighborhood of $600 billion, and that the asset purchases would likely come in the form of mortgage backed securities.  Boockvar is decidedly not in favor of additional quantitative easing as a solution to our current problems:

“As I wrote earlier today, further artificially suppressing the level of interest rates is not the solution to a deleveraging cycle, time and debt paydown/writedown is.  However, central bankers and politicians don’t have the luxury of time and this patience and it’s why QE will continue to be their preferred answer.  At some point they’ll realize it doesn’t work but how much damage will have already been done to the value of paper currencies and resultant inflation before they do?”

According to an article by Jody Shenn on Bloomberg today, “Ben Bernanke is signaling his willingness to double down on a three-year bet that’s failed to revive housing, showing the extent of the Federal Reserve chairman’s effort to wrest a recovery from the deepest recession”.  The article says that the Fed is going to reinvest $200 billion in mortgages from the proceeds of prior asset purchases that are being paid back. Others in the Fed are willing to go further, purchasing additional mortgage backed securities (Barclays estimates as much as $750 billion, total).

There have been rumblings about QE3 since October (actually there were whispers about QE3 immediately after QE2).  In November, Fed Governor Daniel Tarullo and NY Fed President William Dudley both suggested that additional easing is a policy possibility.  In December, Charles Evans mentioned additional Fed MBS purchases at a speech at Ball State.

Back in October, Joseph Gagnon of the Peter Institute for International Economics suggested that the Fed should support HARP 2.0 with a massive round of MBS purchases, as much as $2 trillion worth.  He said that this would drive the 30-year fixed rate to somewhere between 3-3.5%, creating as many as 4 million jobs, millions of new mortgage originations, and reduce household interest expenses by $60-80 billion.

I am not sure whether more easing is good macro-economic policy.  Frankly, I am unqualified to opine, except that it seems to me that the first two rounds have been ineffective in reducing unemployment or significantly bettering our economic situation (possibly they kept things from deteriorating, it is hard to say).  In any case, this bears watching because if QE3 does happen, mortgage rates will fall even further.  I think much of this will depend upon the situtation in Europe.  If it gets worse, we could see the U.S. economy fall back into recession.  If the situation in Europe is resolved, the economy may heal on its own, lessening the chances of QE3.

Stay tuned.