Current Issues Affecting Your Money
QE3: What it Means and How It Impacts You
Quantitative easing. It’s a term that was unfamiliar to many people until recent years and many are still mystified by it. Put simply, it refers to unconventional actions by the Federal Reserve (the Fed) that are meant to stimulate the economy. Specifically, the Fed purchases long-term assets from private institutions with money it creates. These actions are intended to increase financial institutions’ available funds, lowering interest rates, increasing lending, and steadying inflation.
So what is Quantitative Easing 3 (QE3) then? Well, quantitative easing first began in the U.S. in November 2008 on the heels of the recession and was discontinued in June 2010. In August 2010 it was started up again, so that second round of quantitative easing became known as QE2. The first round was retrospectively called QE1. Then a third round of quantitative easing began in September 2012, which was referred to as QE3.
QE3 continues today, but recently the Fed announced that they will “taper,” or slowly discontinue, QE3. Their first move to that end was to decrease purchases from $85 to $75 billion per month. While this is a seemingly small change, tapering could affect the economy, and the economy affects everyone. So how may the tapering of QE3 impact you personally? Here are a few ways that economic experts have discussed while acknowledging that the impact of QE3 tapering is hard to predict.
The most obvious thing that QE3 tapering may affect is interest rates. Rates could increase across the board. This means that the tapering may particularly impact those making major purchases. If you’re planning to buy a house with a mortgage loan or car with an auto loan in the coming months, the interest rate could be higher than it is currently. Tapering may also lead to an increase in the interest rates on student loans. Interest rates have been at historic lows in recent years, so increases are bound to occur eventually. However, no one knows how much or how quickly rates will rise.
On the flip side, rates could also increase on some savings vehicles. This could especially benefit retirees who have fixed incomes and tend to keep a higher percentage of their funds in accounts like CDs and U.S. Treasury securities. Like loan rates though, how fast and how much these interest rates will go up is unknown.
QE3 tapering may also benefit international travelers. As QE3 winds down the value of the dollar could go up. This means that if you’re traveling overseas you’ll get more for your money, presuming you’re paying in cash. In fact, some have even suggested that if you’re planning overseas travel, you may want to wait to book your trip until you see an increase in the value of the dollar as compared to the local currency.
Overall, it’s difficult to estimate what the impacts of QE3 tapering will be if any. However, the situation is worth monitoring. In 2014, the Fed will make more announcements and take further actions. Keeping up with QE3 changes can make you a smarter citizen and consumer.
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