Interest rates rise as QE2 spooks the bond market-

Interest rates rise as QE2 spooks the bond market-

The Federal Reserve announced that it will buy $600 billion in government debt through June 2011, expanding record stimulus and risking its credibility in a bid to reduce unemployment and avert deflation and drive already low long-term interest rates even lower. The central bank would buy the debt in chunks of $75 billion a month. This is a term called “quantitative easing.” It gets the name “QE2″ because this would be the second round for the Federal Reserve. The Fed spent about $1.7 trillion from 2008 to earlier this year to take bonds off the hands of banks and stabilize them. The Fed effectively prints more money and buys Treasury bonds from banks, providing them more cash to lend.

What impact doesQE2 have on potential borrowers entering the housing market? Well, buying so many bonds may lower interest rates because demand for Treasuries leads to higher prices and lower yields. Interest rates are linked to yields. Lower rates should encourage people to borrow money for a mortgage or another loan. There are major concerns, however. It could make the weak dollar even weaker and lead to trade disputes with other countries. It could lead bond traders to believe that higher inflation is on the way and they could derail the Fed’s efforts by pushing rates higher. Since the announcement and implementation of QE2 mortgage rates have continued to increase day to day creating the opposite effect the FED originally intended.

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