Some Thoughts on the Fed’s Latest Guess at Monetary Policy

The good folks at Sober Look have a good post on this.  Basically, the Fed’s latest scheme is to buy $40 billion of mortgage debt from lenders every month until the labor market improves.  That’s nearly a trillion dollars every two years.  And its purpose is to hold down mortgage interest rates in particular, rather than interest rates in general, which have already been artificially lowered to near zero (to negative values in some cases in real, inflation-adjusted terms) for several years.

Those nearly non-existent interest rates generally, though, are associated with 43 months of unemployment above 8% (notwithstanding last week’s Labor Department claim of 7.8% unemployment).  Here’s what Sober Look thinks of this latest…idea…from the Fed.  Follow the links, too.

  1. It is not clear what impact asset purchases will have on consumer confidence.
  2. We’ve had extraordinarily low interest rates for quite some time now, yet improvements in job growth have been limited.
  3. Lowering mortgage rates from 3.5% to 3% is not going to have a significant impact on home affordability or materially reduce consumers’ interest expense (see this discussion).
  4. Raising bank excess reserves is not going to accelerate credit expansion.
  5. Fed’s unemployment targets are unrealistic – it’s going to be an exercise in “squeezing blood from a stone” (see discussion).
  6. US real median household income has basically been unchanged since 1994. The Fed’ program is unlikely to improve this metric and could actually impair incomes further by elevating inflation levels.
  7. The market “euphoria” effect is fleeting.

What will restore employment is less government interference—by the Fed and the Congress and the Executive—in our economy so that free market forces can start an actual recovery.  Which will lead to increased hiring; leading to more savings (in absolute terms, if not relatively), which are funds that can be loaned to support home purchases or business expansion (each of which is jobs) and to more spending, which supports business expansion (which is jobs); leading to increased hiring; leading to….

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