Fed Wants To Wean Housing Market Off Its Trillion-Dollar Intervention

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.

The New York Times reports:

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.

About Luke Ford

Raised a Seventh-Day Adventist at Avondale College in Australia, Luke Ford moved to California in 1977. He graduated from Placer High School in 1984, reported the news at KAHI/KHYL radio for three years, attended Sierra College and UCLA, was largely bedridden by Chronic Fatigue Syndrome for six years, and converted to Judaism in 1993. From 1997-2007, Luke made his living from blogging. Living by Beverly Hills (Alexander90210.com), he now teaches the Alexander Technique (moving the way the body likes to move). Lessons cost $100 each and last about 45 minutes. In 2011, Luke completed a three-year teaching course at the Alexander Training Institute of Los Angeles. His personal Alexander Technique website is Alexander90210.com. Luke is the author of five books, including: » The Producers: Profiles in Frustration » Yesterday’s News Tomorrow: Inside American Jewish Journalism
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