If Fed Ends Quantitative Easing Now, It'll Hurt More Than Just Housing

Federal ReserveJust as we hear that previously occupied home sales hit their second-highest level in three years, we also hear that the Federal Reserve is having second thoughts on its latest round of quantitative easing, also known as QE3.

This is potentially a perfect storm of economic news.

QE3 is the Fed's asset-purchase program: The central bank has committed to use it to buy $40 billion worth of mortgage-backed securities every month. These massive securities purchases by the Fed are designed to drive home lending by the banks, which in turn should boost the housing market.

According to the National Association of Home Builders, America's housing sector has traditionally contributed as much as 18 percent to the country's gross domestic product, hence the importance of QE3 not just to housing, but to the economy as a whole.

Slowing Down the Money Printing Press

The Fed, like any other bank, has a balance sheet, and it's grown big -- too big, some Fed officials say. There's also the worry that maintaining asset purchases at the current pace for too long could cause inflation. To buy these assets, the Fed essentially prints money. Theoretically, the more money in the system, the less each dollar is worth.

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The Fed had initially taken the the unusual step of publicly committing to keep QE3 rolling until the labor market had improved considerably. Now, just as the U.S. housing market is finally beginning to come around, and the economy along with it, that open-ended commitment to QE3 might go away.

The purchase of so many mortgage-backed securities has undoubtedly lent support to America's recovering housing market, and to the economy as a whole. If the Fed decides to end QE3 prematurely, it may knock out an irreplaceable pillar of support from beneath the economy.

John Grgurich is a regular contributor to The Motley Fool. Follow his dispatches from the bleeding heart of capitalism on Twitter @TMFGrgurich.
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