By JLP | September 22, 2011
From today’s WSJ:
The latest move by the chairman was a decision to dramatically recast the Fed’s $2.65 trillion securities portfolio in an effort to reduce long-term interest rates. The Fed plans to shift its holdings so it will have more long-term U.S. Treasury bonds and more mortgage debt than previously planned. It hopes the lower rates will boost investment and spending and provide a shot of adrenaline to the beleaguered housing sector.
The shift toward longer-term Treasury securities was largely expected but slightly bigger than many in the markets had anticipated, and the action on mortgage bonds was a surprise.
What it is exactly:
Under the new program, which resembles a 1961 Fed-Treasury program called “Operation Twist,” the Fed will sell $400 billion in Treasury securities that mature within three years and reinvest the proceeds into securities that mature in six to 30 years, significantly tilting the balance of its holdings toward long-term securities. In addition, it will take the proceeds from its maturing mortgage-backed securities and reinvest them in other mortgage-backed securities. For the past year, it has been reinvesting that money into Treasury bonds, shrinking its mortgage portfolio.
Fed officials have become more concerned about the health of the mortgage market in recent months, with senior officials, including Mr. Bernanke, urging the rest of the government to find ways to support the sector. There has been growing concern in the mortgage industry in recent weeks that even as U.S. Treasury yields have been declining, mortgage rates haven’t fallen as much, preventing many homeowners from refinancing their home loans. The difference in yield between a 10-year Treasury note and a conventional 30-year mortgage has widened by almost half a percentage point.
The goal is to pull long-term interest rates down, which should bring down mortgage rates, which could spark home buying which could help the housing market. Lots of “coulds.”
I have limited knowledge about this stuff but I have to say I’m skeptical. Interest rates are already low and lots of people can’t refinance either because of poor credit or their house isn’t worth as much as it used to be so there’s no advantage to refinancing. Or, they don’t have a job.
The market is skeptical too. As of this writing, the Dow is down nearly 340 points (after dropping 283 points yesterday).
So what do you think? Will it help?
Source: Fed Launches New Stimulus (WSJ)