The Federal Reserve is maintaining steady pressure on the housing market’s lifeline artery – mortgage interest rates.
To protect the recovering housing market from higher interest rates, which could reopen old wounds and cause the national economy to bleed out and sink back into a recessionary coma, the Fed’s Open Market Committee will continue to purchase $40 billion in mortgage securities each month, the Fed reported at it’s last meeting on Dec. 12.
The Fed upped the ante on its long term security holdings, back in September, with “QE3,” the third round of quantitative easing, a spin on monetary policy used to stimulate the national economy.
It also plans to keep the target Fed Funds rate at 0 to 0.25 percent through 2015.
Fed action has already helped keep interest rates below a healthy 4 percent level for most of the year.
Prescription for unemployment
Charles Evans, president of the Federal Reserve Bank of Chicago also foretold of another change in the Fed’s effort to keep the economy on track.
During a speech at the C.D. Howe Institute in Toronto, Canada, Evans suggested the central bank should keep the federal funds rate near zero until unemployment falls to 6.5 percent, down from the previous 7 percent plan.
The national unemployment rate in October was 7.7 percent in November, down from 8.7 percent a year ago, according to the U.S. Department of Labor (DOL).
The unemployment rate has been on a downward trend since a year after President Barack Obama first took office back in 2008. The national unemployment rate peaked at 10 percent in October 2009, according to the DOL.
“This exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal,” the FOMC said in its recent post-meeting prepared statement, weeks after Evan’s comments.
Fiscal cliff complications
The Fed said keeping benchmark interest rates low by upping its securities holdings while employment grows and inflation remains at or below two percent is consistent with its long-term guidance.
The statement didn’t directly mention the looming fiscal cliff, the potential for a recession or seriously retarded economic growth due to higher income taxes and the end of unemployment benefits and other economic stimuli.
It did however, appear to allude to what it might do if its current actions don’t help the economy recover to better health.
“In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments,” the statement said.
The federal agency also promised not to remove life support even from a strengthened economy.
“When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent,” the Fed said.
“To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens,” the Fed statement also reported.
Will the Fed’s efforts generate a bright prognosis for what ails the economy?
Check the infographic below. Mouse click it to enlarge.