Is there another round of QE upon the U.S.?
Recently, Wall Street investors and even some politicians have been discussing the prospect of revaluing the U.S. gold stockpile as a means of quantitative easing (QE). In theory, this could increase liquidity in the market and potentially lower mortgage rates, but there are a lot of variables to consider.
Here, we’ll explore what quantitative easing and revaluing our gold reserves could mean for the economy. We’ll also explore what it could mean for your potential mortgage rate.
How Quantitative Easing Works
Quantitative easing is a monetary policy tool. Central banks use it to stimulate economic growth during challenging times. When implementing QE, the Federal Reserve purchases large amounts of financial assets.
These can include government bonds and mortgage-backed securities from banks and other financial institutions.
This process increases the money supply in the economy, making credit more readily available and pushing interest rates lower across various sectors. As you can imagine, this can ease mortgage rates, at least in the short term.
The primary goals of QE are to:
- Inject liquidity into the financial system
- Lower borrowing costs for businesses and consumers
- Encourage lending and investment
- Boost economic activity and inflation
Essentially, it’s a way to make financing “cheaper,” so it’s easier for people to engage in economic activity.
Quantitative Easing After the Financial Crisis
As an example, the Fed previously implemented a QE program after the 2008 financial crisis. At that time, the Fed’s purchase of $1.25 trillion in qualifying mortgage bonds helped decrease interest rates in the mortgage market by more than 100 basis points (1 percentage point). That’s according to a study by the National Bureau of Economic Research.
This significant rate reduction stimulated over $600 billion in refinancing activity, allowing homeowners to secure lower monthly payments and demonstrating the powerful impact of QE on the housing market.
What’s Gold Got to Do with It?
It may seem like all of this has little to do with gold, but it helps to remember that gold has historically been used as a hedge against inflation and the devaluation of currency. That’s precisely why the U.S. government has (literally) tons of it sitting in Fort Knox.
In fact, the United States holds the most gold of any country on earth. According to a Forbes report, our reserves total 8,133 metric tons.
By today’s numbers, that amount would be worth hundreds of billions of dollars. “But what’s less well-known is that the stockpile’s value has remained at just $42 per ounce since 1973, putting its total value at around $11 billion,” the Forbes report said.
(Source: Bloomberg)
If those stockpiles were revalued at today’s prices, that would put the collateral value of the Treasury’s gold reserves at roughly $750 billion, an increase of about $739 billion. The Treasury could then “pledge its holdings of physical gold to the Fed in exchange for cash,” according to Fast Bull .
This would effectively strengthen the Treasury General Account with extra money, giving the government more spending power and injecting the economy with more liquidity. That, in turn, could reduce interest and mortgage rates.
“While the idea reportedly isn’t under serious consideration by the current administration, the debate over such a move has gathered steam in recent weeks as it’s seen extending Treasury’s ability to borrow under the debt ceiling before an agreement is reached,” said the Bloomberg report.
However, this tactic is rarely used, and it is often treated with skepticism due to the inherent risks.
Why Revaluing Our Gold Reserves is a Radical Prospect
The idea of revaluing gold as a financial strategy poses significant challenges for policymakers. This approach could interfere with the Federal Reserve’s ongoing efforts to manage its balance sheet through quantitative tightening.
It could extend the Fed’s timeline for achieving normalization goals, which have been in action for a few years. Policymakers might not even favor the strategy due to its potential public relations challenges and the risk of minimal benefits.
Attacking a Deficit Problem with a Debt-Relief Solution
According to Zachary Griffiths, head of investment grade and macro strategy at CreditSights Inc., revaluing our gold stocks “might be a viable consideration if we had a debt problem, but we really have a deficit problem,” a report by Financial Post said.
Oddly enough, “$800 to $900 billion doesn’t do a whole lot for us over the longer run,” said Griffiths. “But it’s pretty much a fact.”
In Griffith’s view, revaluing our gold stockpile is a “trick” that could help with the near-term debt and economic challenges. However, it doesn’t address the underlying problem, which is that the government’s expenditures have far outweighed its revenues for some time now.
Not a Long-Term Strategy
It’s also important to note that revaluing our gold reserves to achieve a windfall of cash is not a long-term strategy. Doing so will give the government quick cash and an opportunity to stimulate the economy, but it’s not a strategy it can fall back on in the near future.
It could even have the opposite effect in the long term.
“Although the initial effect on the economy would be positive, the economic boost would be of a short-term nature only,” said a report by Investing.com.
“One reason is that it would result in higher inflation and, therefore, higher long-term interest rates. A related reason is that it would prompt the Fed to extend its [quantitative tightening] in order to absorb the additional money and reserves created by the revaluation.”
Is Revaluing Our Gold Reserve Worth It for Mortgage Rates?
There’s a good chance that revaluing our gold reserves would stimulate the economy to an extent, at least in the short term. Any quantitative easing program could do the same. However, most reports indicate that the current administration isn’t seriously considering the gold option.
From a homebuying perspective, the impact on mortgage rates would also be indirect and potentially minimal.
Mortgage rates are influenced by broader economic conditions. These include the housing market, inflation, economic growth or stagnation, and the bond market. Quantitative easing can impact all of those, but the results aren’t guaranteed.
The rate you secure also depends on factors you have at least some control over. These include your credit score, the loan term you choose, the size of your down payment, and your loan amount.
Ready to Buy a Home?
The best time to buy a home often has less to do with the economy and more to do with your own needs and financial outlook. If you’re ready to start a new chapter in your life, it may make sense to take that step on your own terms instead of the market’s, even if quantitative easing might be on the horizon.
That said, anyone who intends to take out a mortgage should pay close attention to mortgage rates. Obtaining a higher rate than necessary means paying more for your home throughout your mortgage term.
If you want to wait, keep an eye on current mortgage rate trends and economic indicators like inflation and Federal Reserve policies. But you may want to concentrate on improving your own financial factors above anything else.
Consider saving for a larger down payment or improving your credit score to secure better loan terms.
Finally, consider consulting with a mortgage professional or broker. They can help you navigate these uncertainties and make informed decisions about when to buy or refinance.
Contact us at GoldCoast Mortgage for more advice and to learn how we can help.