The Federal Reserve has decided to keep interest rates at their current levels.
They’re pulling back on their program to buy about $1.5 trillion in mortgage-backed securities.
The Fed wants to keep mortgage rates low to keep the housing market from collapsing further.
The Federal Reserve is so deeply involved in the housing market that it will be difficult to get out. Most mortgages made these days are guaranteed by some form of the federal government.
Government intervention got us into this mess by creating a lot of perverse incentives. Politicians forced banks to lend money to a lot of people — particularly certain racial minorities — who were not good credit risks.
If the Fed stops buying massive quantities of mortgage-backed bonds, the market will likely react immediately and send interest rates up. If the Federal Reserve unloads some of its holdings, the market will react immediately in a similar way.
Over the next six months, the Fed plans to stop purchasing mortgage-backed securities.
Even that could cause heartburn for prospective home buyers. Analysts estimate that the Fed is buying more than 80 percent of new mortgage-backed securities.
Private investors have retreated to the sidelines, and no one is sure how rapidly they will return if the Fed retreats.
Ian Shepherdson, a forecaster at High Frequency Economics, said private credit markets were still so weak that an important measure of the money supply, known as M-2, had actually edged down in recent months. That is the opposite of what is supposed to happen under the Fed’s policy of “quantitative easing,” under which it creates large volumes of money out of thin air to buy Treasury bonds and mortgage-backed securities.
“That tells you that the volume of private credit is falling,” Mr. Shepherdson said. If the Fed stops its purchases, he added, the money supply might fall sharply and make credit even harder to obtain. “I just wonder whether they have the stomach for that kind of contraction,” he said.