Nebraska investors likely heard the Federal Reserve has ended what it calls quantitative easing — or the QE3 program — and has stopped buying bonds.
Economist Ed Seifried, professor emeritus at Lafayette College, spoke at the Ag Bankers Conference in Omaha this week. Seifried says instead of selling bonds to purge money from the economy, the Fed is making a different move.
“Today, when a bond matures and the Federal Reserve gets the cash, they immediately go out and buy another bond,” Seifried says. “So the $3.5 trillion stays a constant level, but beginning soon, we think sometime in late 2015 maybe early 2016, they’re going to suspend buying of the bonds again. So when a bond matures, they’re just going to just let it mature, let the cash come into the Federal Reserve and stay there.”
Seifried says it will take ten years for the treasury bonds to mature and 30 years for the mortgage-backed securities to mature. The hope with this strategy is that inflation won’t rise too fast, but neither will interest rates.
“Should they expect rapid rises in interest rates? I don’t think so,” Seifried says. “To me, you might see at most 2 or 2.5% a year until we get back to normal which is a prime lending rate in the 7, 8, 9% range, and they’re 3% today. I think over a period of three or four years, you’ll see it getting back to normal.”
Seifried says the end of QE3 may actually be a negative for ag commodities because the money that was being pumped into the economy also supported commodity purchases and the low dollar stimulated demand.
By Jerry Oster, WNAX, Yankton