Federal Reserve Struggles To Loosen Credit Market

The Federal Reserve is operating a program to buy over one trillion dollars worth of mortgage-backed securities. This keeps mortgage interest rates at record lows.

This program is expensive and members of the Federal Reserve board are arguing about whether to scale it back or to expand it.

Some board members argue that expanding the $1.25 trillion program will inspire a broader economic recovery.

Others argue that the economy's mild signs of recovery are strong enough to merit ending the program.

The Federal Reserve ended up voting to not change its program.

The New York Times reports:

Earlier this year, the Fed began buying billions of dollars of Treasury notes and bonds backed by home mortgages in an effort to lower loan rates and get frozen credit markets flowing again.

Markets have responded, and now, officials inside the Fed and Treasury Department are facing questions about whether they should withdraw some of the extraordinary programs propping up the financial markets. Economists worry that pulling back too soon could drag the economy into a double-dip recession; investors worried about big deficits and the Fed’s expanded balance sheet say inflation could occur if the government is not watchful.

The Fed seemed more concerned about withdrawing its supports too soon.

“Because the improvement in financial markets was due, in part, to support from various government programs, market functioning might deteriorate as those programs wind down,” the committee’s minutes said.

The Fed’s benchmark interest rates are hovering at record low levels near zero, and officials say rates are unlikely to rise anytime soon. But in August, the Fed said its purchase of $300 billion in Treasury securities would slow gradually through the autumn before concluding at the end of October.