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Rose Manni's Blog

By ROSE MANNI | Agent in 01803

Market News


In their final meeting of 2012, the Fed vowed to continue the third round of their Bond buying strategy (known as Quantitative Easing or QE3). They also announced they will begin a fourth round of Quantitative Easing in January.

But what really took the markets by surprise was the Fed's decision to tie the Fed Funds Rate (the rate banks charge each other for lending money overnight) to the Unemployment Rate. Instead of sticking with their plan of maintaining low rates until "at least mid-2015," now the Fed is going to hold the Fed Funds Rate steady as "long as the Unemployment Rate remains above 6.5%."

One of the biggest takeaways from this decision is that the Fed may be more tolerant of a rise in inflation. Lower unemployment would mean that the economy is gaining some steam, thanks in part to the stimulus programs like QE3 that are currently underway, and inflation could easily trend higher in an improving economy. Remember, inflation is the archenemy of Bonds--and, therefore, of home loan rates, since home loan rates are tied to Mortgage Bonds--because inflation reduces the value of fixed investments like Bonds.

Recent reports have shown that inflation remains tame. However, when inflation manifests, it tends to do so quickly. So the Fed's Quantiative Easing (as well as inflation) will be important to watch in the weeks and months ahead.
by Jeff Palermo
Reliant Mortgage




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