Fed economic plan could lower mortgage rates

Fed economic plan could lower mortgage rates

WASHINGTON – Sept. 14, 2012 – In a bold effort to reduce borrowing costs for homebuyers and bolster the recovery, the Federal Reserve says it will buy mortgage-backed securities until job growth picks up significantly.

Thursday’s announcement marks the first time the Fed has committed to an open-ended plan to buy government bonds until the economy improves. Economists say that can have more powerful effects than the Fed’s previous $2.3 trillion in Treasury and mortgage bond purchases.

Investors cheered, pushing stock markets to their highest levels in at least five years.

The Fed agreed to buy $40 billion a month in mortgage-backed securities. It also extended its likely timetable for keeping short-term interests near zero from late 2014 to mid-2015.

“We don’t have tools strong enough to solve” high unemployment, Fed Chairman Ben Bernanke said. “We’re just trying to get the economy moving in the right direction.”

Along with an existing Treasury bond-buying program ending in December, the Fed plans to purchase $85 billion a month in long-term bonds through year’s end. That should lower long-term rates and make loans less costly for consumers and businesses.

The Fed said it will continue buying mortgage bonds and may buy other assets if “the labor market doesn’t improve substantially.” It vowed to keep its easy-money policies going even after the recovery strengthens.

“It’s a bold move,” says economist Michael Gapen of Barclays Capital.

He predicts it will bring down mortgage rates by up to a half-percentage point and add two tenths of a percentage point to economic growth over the next year. Unemployment should fall by another two-tenths of a percentage point, says Mark Zandi, chief economist of Moody’s Analytics.

The Fed slightly cut its 2012 forecast, projecting the economy will grow at a 1.7 percent to 2 percent annual rate. It expects unemployment, now 8.1 percent, to dip to 7.6 percent to 7.9 percent by the end of 2013.

With interest rates low and banks tight-fisted, the benefits of the Fed’s plan may be limited. Almost two-thirds of the 40 economists that USA TODAY surveyed after the announcement said the Fed’s actions would help the economy only a little by January. As many said the impact on the housing market would be as slight.

© Copyright 2012 USA TODAY, a division of Gannett Co. Inc., Paul Davidson