Mortgage rates plunged a day after the Federal Reserve committed another $1.15 trillion to revive lending. But while most experts welcomed policymakers' aggressive action, they cautioned that it isn't an economic cure-all.
The 30-year home loan rate dived more than 40 basis points Thursday to a near-record low of 4.75%, Zillow.com said. Economists see potential for further easing to fuel a wave of refinancing and stimulate homebuying.
The Fed said Wednesday that it would boost its buys of mortgage-backed securities from government-sponsored entities by $750 billion to a total of $1.25 trillion in 2009. It will double its purchases of agency mortgage debt to $200 billion. Last, but not least, it will buy up to $300 billion in longer-term Treasuries over six months.
Seeing a possibility that mortgage rates could fall to 4.5%, Morgan Stanley economist David Greenlaw noted that household cash flows could get a boost of $200 billion a year if all homeowners were able to refinance.
But estimates suggest that more than 50% of homeowners lack the equity to qualify, so the real benefit is likely to be far less.
Doubling Down
While some characterized the Fed's flurry of moves as "shock and awe," Joshua Feinman, chief economist at Deutsche Asset Management in the Americas, said "the Fed is just doing more of what they're already doing."
Doubling the Fed's balance sheet didn't solve the economy's problems, and neither will tripling it, Feinman said.
But he does see the Fed moves as constructive efforts "to stop the bleeding" and "start forming a foundation for the economy to begin recovering next year."
"The good news," said IHS Global Insight economist Michael Montgomery, "is that they're firing all of their weapons, but the bad news is that the economy needs all the help it can get."
He still sees the jobless rate peaking at an "ugly" 10.3% rate in 2010.
This vast expansion of the Fed's balance sheet -- the equivalent of printing new money -- comes as the central bank this week begins rolling out what it hopes will become a $1 trillion program to restart the asset-backed securities market for non-mortgage consumer debt and small-business loans.
The 10-year Treasury yield rose 9 basis points to 2.60%, still down more than 40 ticks from Tuesday.
Dollar Dives, Gold Spikes
But with the Fed's printing press revving up, the dollar sold off for a second day vs. other major currencies, evidence that its aggressive tactics aren't without risk. Gold surged nearly $70 an ounce as commodities soared across the board on inflation concerns.
Stocks retreated Thursday after Wednesday's rally. Financials led the sell-off.
The Fed's efforts are all geared to lifting the economy with new credit creation. But some question whether those efforts can provide much lift if there are too few creditworthy borrowers.
Asset manager Bridgewater Associates sees need for an economy-wide debt restructuring before normal economic activity can resume and, thus, it expects little credit creation from the Fed's efforts.
It also sees the Fed's Treasury buys eventually reaching $1.5 trillion to $2 trillion.
Feinman thinks the Fed is doing everything in its power. He worries that a "noxious" political mood will forestall a necessary cleaning up of the banking system.
Fed Chairman Ben Bernanke hinted at a similar concern during a weekend "60 Minutes" interview: "I think the biggest risk is that, you know, we don't have the political will . . . to solve this problem."
The Fed's move to bring down interest rates with its Treasury purchases is really a combination of playing offense and defense, Montgomery says.
While there's no doubting the aggressive bent of policy, the Fed is fighting a tide pressuring yields higher. There's an unprecedented increase in government borrowing just as foreign buyers' appetite for U.S. debt seems to be waning.
Source: Investor's Business Daily
