Fed Expected to Announce New Stimulus Wednesday

By:
Kirk Haverkamp | November 03, 2010

The last time the Federal Reserve announced that it would make a big purchase of government securities to boost the economy, mortgage interest rates plummeted and homeowners rushed to refinance their loans. This time, the reaction might just be a big yawn. 

The Fed is widely expected to announce Wednesday afternoon that it plans to make a significant purchase of Treasury bonds as a boost to the stagnant economy.  Known as “quantitative easing,” such measures are designed to inject capital into the economy and free up credit by providing banks with more money to lend.
 
Unfortunately, a lack of capital is not what’s keeping banks from lending these days. And with interest rates already at rock-bottom levels, any further rate reductions seem unlikely to spur much interest among potential borrowers.
 

Move been expected for weeks

 
Any impact on mortgage rates is expected to be minimal, in part because Federal Chairman Ben Bernanke has been broadly hinting at such a move since the last meeting of the Fed’s Open Market Committee in September. As a result, current mortgage rates already take the Fed’s anticipated action into account, although there could be some movement if the Fed’s action is more aggressive than most expect.
 
According to which group of economists you survey, the Fed is expected to announce that it plans to purchase from $500 billion to $1 trillion in Treasury bonds in the months ahead. That compares to $1.25 trillion in various securities the Fed committed to purchase in March 2009, on top of $500 billion previously announced earlier that year.
 
That $1.75 trillion in economic stimulus came at a time when the outlook for the economy and housing market overall was still at its darkest. Mortgage rates dropped to record lows and homeowners rushed in to refinance.
 
This time around, the impact has been more muted. Mortgage rates have already been declining steadily since last spring, setting new lows a full half a percentage point below last year’s records, but without triggering renewed interest in home buying. Demand for refinancing has been more subdued than in spring 2009, although that’s partly because the decline in rates has been drawn out over a longer time.
 

Small boost to economy expected

 
Most economists seem to think the Fed’s expected action will provide a small boost to the economy, although it’s still expected to struggle for some time. A certain amount of inflation is considered necessary for job growth and economic expansion, and Fed officials have hinted in the past that current inflation may be too low. And one of the classic ways to boost inflation is to pump more money into the economy.
 
Critics of the move don’t seem to think it will cause any short-term harm, just that it just won’t have much impact. The greater, long-term concern is that all that liquidity pumped into the inflation could set off hyperinflation if the economy starts to grow again before all that excess capital can be drained from the system.
 
The Fed’s meeting is scheduled to conclude at 2:15 p.m. on Wednesday, with an announcement of any decisions to follow shortly thereafter.

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