If QE3 Sails, Will It Sink or Save Your Finances?

During the last meeting of the Federal Open Market Committee of the Federal Reserve, members decided that it was time to try and stimulate the economy more. The Fed announced what people are calling Operation Twist. (So named because short-term bonds are being "twisted" into longer maturities.)

While the Fed doesn't consider Operation Twist actual quantitative easing, there are some that think that $400 billion isn't enough economic stimulus. Instead, there's speculation that another round of full-scale quantitative easing -- dubbed QE3 -- could follow if Operation Twist doesn't deliver the results policy-makers would like.

The idea behind quantitative easing is to keep interest rates low, pulling down nominal rates so that businesses and others will be more inclined to borrow at lower rates -- and spend money to stimulate the economy. Since the Fed can't directly lower the Fed Funds Rate anymore, since it's already quite close to zero, they'll have to use other tools to accomplish this goal. And that could mean the Fed will buy debt securities from the Treasury, and even from private organizations, to inject more cash into the economy.

With economic data continuing to disappoint, and with yet another downgrade for the U.S. economic outlook, it really isn't surprising that the Fed launched Operation Twist. What's surprising to many is that the effort only involved $400 billion. That's why many obervers believe that Operation Twist won't be sufficient and that QE3 will be the logical next step. 

What Would QE3 Mean for You?

At the most basic level, more quantitative easing means that your savings yield is going to remain low for quite some time. Because the point of quantitative easing (and other stimulus efforts) is to make saving less attractive so that business and individuals will be more inclined to spend money and borrow at low interest rates, savings interest rates will continue to disappoint. 

High yield savings are basically a joke right now and will remain so for the foreseeable future. Better interest rates on loans, though, are the flip side of this coin. While you might not get the best rates on your cash products, now might be a good time to take advantage of low interest rates. You could refinance your house, buy a home (prices are low, as rates are), purchase a car, or consolidate your debt, or transfer yourcredit card balance, to a lower interest rate.

If you have been thinking about making a major purchase with incurring too much debt, now might be an ideal time to do so since monetary policy leaders are trying to make borrowing attractive.

Stock Market Bubble?

You might also be affected by a possible stock market bubble. One of the effects of quantitative easing is that it tends to prop up the stock market. Sure, the stock market dropped when the Fed downgraded its economic outlook. However, just a day later stocks were rising again. And many analysts credit QE2 for the stock market gains in late 2010 through the first part of 2011.

Many worry that QE3, if enacted, would create a stock market bubble that could burst at an inopportune time. Additionally, there are concerns that more quantitative easing could lead to inflation down the road. Economic growth and inflation go hand in hand, but in some cases quantitative easing can get out of hand and lead to more inflation than desired. That would impact your pocketbook as prices rise.

In the end, one thing is clear: If QE3 happens it will affect your personal finances, even if the impact is indirect at first.