As they begin a two-day meeting today, Federal Reserve policy makers will be considering buying mortgage-backed securities in order to push down borrowing costs and help homeowners refinance their debt. Doing so would reduce monthly payments, thus freeing up cash for other purchases that could spur the economy and help reduce unemployment, said Fed Governor Daniel Tarullo.
The Fed’s plan could save homeowners $60 billion to $80 billion a year, or roughly 0.5% of the nation’s gross domestic product, so long as the Obama administration succeeds in pushing through its refinancing aid plan. However, should Obama’s program fail, Fed asset-buying would probably provide homeowners with less than half its potential savings.
“The Achilles’ heel of the Fed’s efforts so far has been that the monetary-policy transmission has not worked as they would like because of, in large part, the inability of consumers to get loans” for homes and other purchases, said Ward McCarthy, chief financial economist at Jefferies & Co. in New York.
On October 24, the Federal Housing Finance Agency announced that it would let qualified homeowners refinance mortgages regardless of how much their homes may have dropped in value, thus expanding the terms of the 2009 Home Affordable Refinance Program in order to pave the way for about 900,000 more refinanced loans by the end of 2013. However, if homeowners don’t take advantage of the program, the Fed purchases of mortgage bonds would bring limited benefits.
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Bernanke said in congressional testimony last month that the Fed needs help from other branches of the government if it is to repair the economy. “Monetary policy can be a powerful tool, but it is not a panacea for the problems currently faced by the U.S. economy,” he told the Joint Economic Committee on October 4.
The Federal Open Market Committee plans to release a statement tomorrow along with economic projections from governors and regional Fed presidents. Bernanke is scheduled to hold a press conference at 2:15 p.m., his first since June.