Federal ReserveJust as we hear that previously occupied home sales hit their second-highest level in three years, we also hear that the Federal Reserve is having second thoughts on its latest round of quantitative easing, also known as QE3.

This is potentially a perfect storm of economic news.

QE3 is the Fed's asset-purchase program: The central bank has committed to use it to buy $40 billion worth of mortgage-backed securities every month. These massive securities purchases by the Fed are designed to drive home lending by the banks, which in turn should boost the housing market.

According to the National Association of Home Builders, America's housing sector has traditionally contributed as much as 18 percent to the country's gross domestic product, hence the importance of QE3 not just to housing, but to the economy as a whole.

Slowing Down the Money Printing Press

The Fed, like any other bank, has a balance sheet, and it's grown big -- too big, some Fed officials say. There's also the worry that maintaining asset purchases at the current pace for too long could cause inflation. To buy these assets, the Fed essentially prints money. Theoretically, the more money in the system, the less each dollar is worth.

The Fed had initially taken the the unusual step of publicly committing to keep QE3 rolling until the labor market had improved considerably. Now, just as the U.S. housing market is finally beginning to come around, and the economy along with it, that open-ended commitment to QE3 might go away.

The purchase of so many mortgage-backed securities has undoubtedly lent support to America's recovering housing market, and to the economy as a whole. If the Fed decides to end QE3 prematurely, it may knock out an irreplaceable pillar of support from beneath the economy.

John Grgurich is a regular contributor to The Motley Fool. Follow his dispatches from the bleeding heart of capitalism on Twitter @TMFGrgurich.

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10 Comments

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marine1942

Barry and Ben have ruined the economy.

February 27 2013 at 9:11 AM Report abuse +1 rate up rate down Reply
pbirch3074

Sooner or later its going to hurt anyway. Bubbles burst, things get out of wack. The sooner you suffer the pain the sooner it has a chance to get better. When the pain becomes political the politicians intervene to try and reduce it but all too often it just prolongs it. We're in the prolongation stage now. Will we muddle through and come out in better times? I don't know but there is also a reasonable chance it could get worse again before it gets better. If oil prices start to decline (a good chance IMO) and the Euro Zone does not start to implode again (not holding my breath) maybe we'll get lucky. As a saver I'm sick of being screwed by abnormally low interest rates but I understand the reasons for them. The status quo can't continue much longer IMO.

February 23 2013 at 8:05 PM Report abuse +1 rate up rate down Reply
joethightwad

"Theoretically, the more money in the system, the less each dollar is worth." That was more true forty years ago than it is today. The Bretton Woods system of world currencies pegged to the dollar and the dollar to gold ended long ago. With all major currencies now "floating" against each other a dollar, a mark, a yen, a pound, a euro have value relative only to each other. If the U.S. was alone in printing money to stimulate its economy, there would be an inflationary damger facing us. But all major central banks are doing the same thing. Thus the relative value among them remains largely unchanged along with their buying power.

February 22 2013 at 10:15 AM Report abuse rate up rate down Reply
granaryst

If the Fed doesn't end quanitative easing, it will kill our nation.

February 22 2013 at 2:25 AM Report abuse +5 rate up rate down Reply
Gumby

All that simply because we are addicted to oil...!! Nah? OK, we are paying one trillon dollars more for oil products every year that led to crash of '08 ! Because of that, everything fell apart! Even at $4 or $5 a gallon, workers are still driving alone to work and back home! I thought that we would start carpooling or ride public transporatoin by now. We are not saving ouselves at all!

February 22 2013 at 2:11 AM Report abuse -5 rate up rate down Reply
kentblackdog

Notice how it take more dollars to buy the same thing, it took to buy today vs. 4 years ago.

Printing more and more money, DEVALUES the money------so it takes more dollars to buy the same things, that when there were fewer dollars.

The key word--DEVALUE

Reason--Obama's creating more and more money, delvalues what the dollar will buy

February 22 2013 at 12:37 AM Report abuse +4 rate up rate down Reply
frank1946

Santa Claus is leaving the Building !

Say your Goodbyes.

10 yr. Bond @ 3 % by 12/31/13.

February 21 2013 at 11:23 PM Report abuse +4 rate up rate down Reply
nsoccio

Helicopitor Ben should be forced to step down or asked to leave this country, his policies have destroyed this country. The Responsible Savers & Retired people, the cloth of this country got SCREWED. Bernanke's policy of driving Interest Rates to the lowest levels in history, hasn't done one thing to help this economy. When he started lowering Interest rates in August of 07 that was the BEGINING OF THE END. If he had left the Prime Rate alone back in 07we would have never this mess. If Ron Paul gets his way, & The Federal Reserve Board get's Audited. Ben Bernanke & some of his cronies will be facing criminal charges.

February 21 2013 at 8:07 PM Report abuse +7 rate up rate down Reply
1 reply to nsoccio's comment
ga7smi

he should be in prison

February 21 2013 at 11:37 PM Report abuse +4 rate up rate down Reply
johnkocher

Perhaps, just perhaps this was a good idea 4 years ago, but it certainly isn't now. We can't continue to print ever cheaper money forever. Either we start to live rational financial lives now and bite the bullet, or we face much more terrible consequences in the future. The same applies to our fiscal mess and enormous deficits.

February 21 2013 at 7:09 PM Report abuse +1 rate up rate down Reply
Big John

The only people Bernanke are helping are the banks and blue stock traders on Wall Street. The savers and retired people are taking a killing. This article is right, some will be hurt but many more will be helped.

February 21 2013 at 6:27 PM Report abuse +4 rate up rate down Reply
1 reply to Big John's comment
ga7smi

true - bet the rest of the economy is getting some help from this - interest rate increases will help the rich and no one else

February 21 2013 at 11:39 PM Report abuse -2 rate up rate down Reply