Skeptical economists have authored and presented a paper criticizing the Federal Reserve’s asset purchases during the 2008 financial crisis. They argue that in the future, instead of making large scale asset purchases (LSAP), which were a key part of quantitative easing (QE) in the wake of the housing and financial meltdowns in the mid-2000s, the Fed should consider the short-term interest rate its “most important and reliable instrument of monetary policy.”
Both long- and short-term interest rates affect the national housing market because they both affect how traditional homebuyers can obtain a conventional mortgage. For example, if a buyer wishes to finance a home using the standard 30-year fixed-rate mortgage, then they will evaluate how much home they can afford based on long-term interest rates. These rates usually tend to be higher than short-term rates, although the two usually rise and fall in tandem. Short-term interest rates most directly affect buyers using adjustable-rate mortgages, which tend to have windows of time during which the rate holds steady but can be adjusted upward or downward at predetermined intervals.
In the wake of the housing and financial crises, the Fed purchased longer-term securities issued by the U.S. government and longer-term securities guaranteed by government-sponsored agencies like Fannie Mae and Freddie Mac. This is called, “conducting LSAPs.” When the Fed purchased large quantities of these securities, the available supply on the open market went down; the prices on those securities rose, and the securities’ yields fell. When mortgage-backed securities (MBS) yields fell, mortgage rates fell, which led private investors to a number of actions including buying corporate bonds, which now had relatively higher yields, and other securities.
“Thus, the overall effect of the Fed’s LSAPs was to put downward pressure on yields of a wide range of longer-term securities, support mortgage markets, and promote a stronger economic recovery,” Fed FAQ materials state. The economists mentioned above dispute this and argue that less money could have been spent on LSAPs with the same end result of keeping mortgage rates low.
0 Comments