QE3 - The Good, The Bad And The Ugly

Sep 24, 2012

The US Federal Reserve launched a third round of quantitative easing last week, concerned about a lack of consumer and business spending. Dubbed QE3, the policy’s great for borrowers, bad for retirees on fixed income, and a mixed bag for Connecticut regional banks. WNPR’s Sujata Srinivasan reports.

It’s raining money. The Federal Reserve said it’s going to buy mortgage-backed securities from the open market at a pace of $40 billion each month, until the economy picks up. The goal is to drive mortgage interest rates low enough to spur home purchases, and thereby stimulate economic growth. But Simsbury Bank CEO Martin Geitz says rates are already at historic lows and there’s not too much room to fall. But what it’ll do is give confidence to buyers that rates will stay low for a while, and give time to those with poor credit histories to improve their scores.

“QE3 by keeping interest rates low, will allow households to get their financial balance sheets in better shape, which in turn improves the economy, which improves our ability to do business.”

Geitz, also chairman of Connecticut Bankers Association, says low rates on commercial loans could make borrowing easier for local businesses to expand.

“I would expect that rates will continue to be low for a while. So a good commercial borrower for example would be able to borrow for a new building or some equipment somewhere in the fours – 4%, 4.5%, 4 ¾%.”

The flip side of low interest rates is a reduction in bank profits. Rates are already under 4% percent for the 30-year fixed mortgage, and under 3% for 15-year home loans. Plus regional banks have high regulatory costs and lower margins from increased competition.

“For the banks it’s really tough because your funding cost at a bank is about as low as it’s going to go.”

That’s William Crawford, CEO of Rockville Bank. He says the other concern is when rates go up – and someday they will – banks will be left with low interest income from existing fixed mortgages. That’s going to hurt the balance sheet.  

“But I do think regulators understand that, banks understand that and everybody’s managing their interest rate risk the best they can.”

Not all banks need extra cash from the Fed. Last year, Farmington Bank raised $180 million from the capital market. It also plans to hold on to its mortgages, not sell them. CEO John Patrick:

“We think they’re good investments. We think they’re better alternatives than investing into the securities market at this time. We also believe that as a bank, and a community bank, it’s important for us to stimulate the economy ourselves.”

Patrick says the broader problem is not long-term interest rate, but employment.

“We can keep rates at zero but until people start working – that’s the cash flow that provides them the ability to go out and buy a house and repay a debt and that’s what’s important.”

Many businesses are holding back on investing because they’re not sure what to expect, says Peter Gioia, economist at the Connecticut Business & Industry Association. 

“Congressional uncertainties on tax issues, whether it be uncertainties on costs of implementing the healthcare reform law. These uncertainties I think are playing much more on businesses right now than interest rates short-term or long-term.”

Retirees and others on fixed savings income – people who worked hard and saved carefully – are going to continue to feel the pain of low interest rates. Perhaps as the writer Emerson said: “Money often costs too much.”

For WNPR, I’m Sujata Srinivasan.