Economy Watch: QE3 Arrives

By Dees Stribling, Contributing Editor

QE3 turned out to be a different creature than the preceding quantitative easings. Instead of a concentrated stimulus in the form of bond purchases, the Fed has decided to beat the drum steadily. “The [Federal Open Market] Committee agreed today to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month,” the central bank said in its press statement.

The Twist will also continue, which is the policy of the Fed that extends the average maturity of its holdings. The central bank will also reinvest what it makes from its already sizable holdings. All together, the statement noted, “these actions, which together will increase the Committee’s holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.”

Another QE3 difference is that the FOMC directly tied this round of asset purchases to the health of the labor market. “If the outlook for the labor market does not improve substantially, the Committee will continue its purchases…” was the key phrasing. Better employment numbers, presumably, will cause the Fed to slack off a bit.

How long will the QE3 drumbeat? According to the Fed, as long as it needs to, with the possibility that some months will see more asset purchases than others. Significantly, the Fed’s statement said that it would continue purchases until “after” the economic recovery strengthens. In other words, the main goal of the stimulus is to accelerate the economy, which is already growing, but growing too slowly.

Economists and other observers, as usual, don’t agree on whether QE3 will be effective. It’s possible that the lower mortgage rates that the FOMC hopes to inspire will help the housing market in its recovery, which has picked up lately, but is still slow. Much other economic growth is tied to a recovery in the housing market.

In any case, Wall Street took the Fed’s words to heart. Almost immediately after the press statement was released on Thursday—practically to the minute—investors started buying. The Dow Jones Industrial Average gained 206.51 points by the end of the trading day, or 1.55 percent. The S&P 500 was up 1.63 percent and the Nasdaq advanced 1.33 percent.

Foreclosures static, except in a few states

RealtyTrac reported on Thursday that foreclosure filings—default notices, scheduled auctions and bank repossessions—were reported on 193,508 properties nationwide in August, an increase of 1 percent from July but down 15 percent from August 2011. One in every 681 U.S. housing units endured a foreclosure filing during the month.

Illinois posted the nation’s highest foreclosure rate, one in every 298 housing units with a foreclosure filing. August was the first month that the state has ranked No. 1 since RealtyTrac began issuing its report in January 2005. Twenty states registered year-over-year increases in foreclosure activity, led by judicial foreclosure states such as New Jersey, New York, Maryland, Illinois and Pennsylvania.

“Bucking the national trend, deferred foreclosure activity boiled over in several states in August,” RealtyTrac vice president Daren Blomquist said in a press statement. “In judicial states such as Florida, Illinois, New Jersey and New York, this was a continuation of a trend we’ve been seeing for several months now. Previous to August, the nation’s top two state foreclosure rates have been from those four non-judicial states every month since December 2010.”