Deutsche Bank (DB) economists say the Federal Reserve can still significantly boost the economy with an extra round of quantitative easing. Even housing, they say, could reap some rewards.
However, it probably won’t announce such a move in the near-term. The Federal Open Market Committee meets next week to determine if additional economic stimulus is needed.
Deutsche speculates that, in the unlikely case the Fed moves forward with QE3 “it would most likely involve exchanging Treasuries for MBS in an effort to reduce mortgage spreads, as the scope for exchanging short-term Treasuries for longer-term Treasuries will be quite limited once the current Maturity Extension Program has run its course by this December.”
The likely result of such an action could provide a uptick in economic activity in many ways. QE3 would reduce the level of longer term interest rates, for example. It would not only bolster liquidity, but cement the Fed’s dedication to supporting the fiancial markets.
Even better, QE3 could “possibly boost the housing sector more directly by either purchasing MBS rather than Treasuries or twisting into MBS and out of Treasuries.”
However, there are some cons. “If the Federal Reserve became too dominant a buyer in certain segments of these markets, trading among private agents could dry up, degrading liquidity and price discovery,” they state.
