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Derrick Strauss of All Western Mortgage Speculates on Federal QE3 Program End

Derrick Strauss of All Western Mortgage Speculates on Federal QE3 Program End

Derrick StraussDerrick Strauss answers questions about the U.S. Central Bank’s bond buying program.

Q: What is QE3?

Derrick Strauss: QE stands for quantitative easing. The 3 indicates this is the third round of the program.

Q: Who funds this program?

Derrick Strauss: The U.S. government, via central banks.

Q: How much does the U.S. buy out each month?

Derrick Strauss: Originally, it was $40 billion, which was raised to $85 billion in December.

Q: We understand that Ben Bernanke recently announced a change to the QE3 program?

Derrick Strauss: He said that the Fed would begin tapering the dollar amount starting in September. He hinted that this would begin with a $20 billion per month decrease. However, that hasn’t happened.

Q: Will the program remain in effect through the end of the year?

Derrick Strauss: Most strategists predict that the tapering will not actually begin until at least the beginning of next year.

Q: What determines whether the Federal Reserve makes changes to QE3?

Derrick Strauss: Job growth, the housing market, and unemployment rates, as they are the main indicators of how the economy is doing overall.

Q: Why would the federal chairman announce a change and then not follow through?

Derrick Strauss: The number of new jobs created earlier this summer fell far shorter than expected, although the overall unemployment rate dropped to 7.4 percent.

Q: How does this affect U.S. equity funds?

Derrick Strauss: We saw a $40.3 billion inflow in July of this year after June saw a nearly $70 billion outflow.

Q: And investors are dumping bonds?

Derrick Strauss: Yes, in July alone investors got rid of more than $21 billion in bonds. This creates higher yield, which is the reason the Fed has had to rethink its tapering plan.

Q: What does this say about the growth of the economy?

Derrick Strauss: Hopefully that we will continue to avoid another recession.

Q: Will the economy see a steady recovery?

Derrick Strauss: Yes, but it will be modest. I don’t think that investors will see such volatile up-and-down gains in the coming years as they did before the recession.

Q: Is the program going to end?

Derrick Strauss: Eventually, yes, but Bernanke said it would be mid-2014 before that would happen.

Q: Is moderate growth enough to convince the Fed to pull the program?

Derrick Strauss: The real question is if the growth is sustainable. If it’s not, the Fed will likely continue its buyout program.

Q: And if it is sustainable?

Derrick Strauss: The markets will go back to normal, and the federal government won’t resort to such drastic measures as a sort of bailout.

Q: Many experts disagree on whether the Fed should even continue to plan. Why such mixed messages?

Derrick Strauss: A lot of that has to do with not scaring the public. When you have the government making any sort of move it tends to freak people out.

Q: Not even considering government programs, in your opinion, how does the housing industry look today?

Derrick Strauss: The housing market is definitely strong. We’re seeing more than fair interest rates and a number of new homebuyers every month.

Q: Just one final question. Is the U.S. the only country that has used a program like this?

Derrick Strauss: No, Japan actually just recently announced that it would expand its asset purchase program by nearly $1.5 trillion over the next two years. The European Central Bank, the Swiss Central Bank, and the Bank of England have all implemented similarly structured stimulus programs.

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