Fed Pulls Trigger, to Buy Mortgages in Effort to Lower Rates
The Federal Reserve fulfilled expectations of more
stimulus for the faltering economy, taking aim now at driving down mortgage
rates until an improvement in unemployment that the central bank says will be a
problem for several years.
The Fed said it will buy $40 billion of mortgage-backed
securities per month in an attempt to foster a nascent recovery in the real
estate market.
The purchases will be open-ended, meaning that they will
continue until the Fed is satisfied that economic conditions, primarily in
unemployment, improve.
"There's strong hints that they'll do Treasurys next,"
Joe LaVorgna, chief economist at Deutsche Bank Advisors, said in a phone
interview from London. "They're pulling out all the stops to try to get this
economy to gain some traction and, most important, to get unemployment
down."
The stock
market, which had been slightly positive prior to the
decision, shortly after 12:30 p.m., surged while bond yields, particularly
farther out on the curve, jumped higher. Gold and other metals gained at least 1
percent across the board while the dollar slid against most global
currencies.
Enacting the third leg of quantitative easing, or QE3,
will take the Fed's money creation past the $3 trillion level since it began the
process in 2008.
"The Committee is concerned that, without further policy
accommodation, economic growth might not be strong enough to generate sustained
improvement in labor market conditions," the Open Market Committee said in a
statement.
As a follow-up to the statement, the Fed released its
latest economic projections, which foresee slow growth including a jobless rate
that stays above 7 percent into 2014. The economic projections expect growth to
remain slow but to improve due to the stimulate measures announced Thursday.
In addition, the Fed said it will continue its program of
selling shorter-dated government debt and buying longer-term securities, a
mechanism known as Operation Twist. It also will continue its policy of
reinvesting principal payments from agency debt and mortgage-backed securities
back into mortgages.
The Fed left its funds rate unchanged at near-zero but
offered one change in that regard, saying the rate would stay at "exceptionally
low levels" until at least mid-2015.
"These actions, which together will increase the
Committee’s holdings of longer-term securities by about $85 billion each month
through the end of the year, should put downward pressure on longer-term
interest rates, support mortgage markets, and help to make broader financial
conditions more accommodative," the Fed statement said.
The vote was 11-1, with Jeffrey Lacker voting against the
notion of asset purchases as well as setting a time frame for rates.
At an afternoon news conference, Fed Chairman Ben
Bernanke offered a defense of the Fed's QE activities, saying they are not
adding to the government budget deficit nor causing runaway inflation.
In addition, he addressed concerns that savers are being
penalized from low interest rates, saying that the policy has allowed for growth
in other areas.
"While low interest rates impose some costs, Americans
will ultimately benefit most from the healthy and growing economy that low
interest rates promote," he said.
Bernanke also issued his latest challenge to Washington
to get serious about fiscal policy.
"We can't solve this problem by ourselves," he said.
But Fed critics contended that QE3 will not succeed where
its two predecessors failed.
"By doing QE3, he has admitted that QE1 and QE2 have not
been beneficial. Otherwise, there would be no need for QE3," said Michael Pento,
president of Pento Portfolio Strategies. "If the unemployment rates stays
elevated and inflation exceeds his 2 percent target, what is his next move?"
With a summertime rally pinned on hopes for aggressive
central bank intervention — both in the U.S. and Europe — the Fed essentially
split the difference, offering a quantitative easing program
the aggressiveness of which will depend on the strength of the recovery.
"The language of its policy stimulus leaves us in little
doubt that the central bank is trying hard to allay fears over the prospects for
inflation, which it continues to see as a low likelihood, as well as its exit
strategy," said Andrew Wilkinson, chief economic strategist at Miller Tabak in
New York. "The Fed is going all out to say that easy money is here for a very
long time. Will markets warm to its latest actions? We think so."
Doug Roberts, chief investment strategist at Channel
Capital Research, said small-cap stocks, technology shares and precious metals
probably will be the chief beneficiaries of QE3.
"What QE3 does is inject liquidity," he said. "Right now
what you do is follow the Fed."
Though the Fed is ostensibly politically independent, the
decision comes at a ticklish time with the presidential election less than two
months away.
Washington conservatives have been critical of the
central bank's money creation, which has caused its balance sheet to swell to
$2.8 trillion. They worry that the growing money supply will lead to inflation,
which has reared its head in food and
energy prices but has remained tame through the broader
economy.
Bill Gross, who runs bond giant Pimco, said the new round
of easing would take the Fed's balance sheet up to nearly $3.5 trillion if the
purchases continue for a year.
"That potentially is reflationary," he told CNBC. "We're
just to have to see if it works."
Faced with an unemployment rate stubbornly
above 8 percent and other indicators showing only halting signs of recovery, the
Fed was pressed into action by a market worried that the nascent recovery was on
wobbly ground and needed more stimulus.
Two previous rounds of QE had uneven effects on economic
growth though they did manage to levitate stock prices by more than 100 percent
from their March 2009 lows.
CNBC
CNBC
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