Meeting with Central Bankers Offer Fed an Alternative Buying Plan
Northwestern University economists Arvind Krishnamurthy and Annette Vissing-Jorgensen have written a paper which was unveiled at the meeting of central bankers in Jackson Hole, WY. This paper introduced 3 steps that are designed to help with the slow-down of the bond buying program that has been going on since the end of the Recession. The bond buying program translates to the Fed purchasing $85 billion in Treasury Bonds and mortgage-backed securities each month. Most of Wall Street fears that if the Fed slows down the bond buying program, the reaction of the market will be an increase in mortgage rates which will cause the strengthening of the housing market to come screeching to a halt.
Ever since news of a reduction in bond purchases, home buyers have seen a 1.3% increase in mortage rates in less than a 3-month time period. The decrease in bond purchases plans to reduce the amount of Treasuries (Treasury Bonds) purchased by $10 million and reduce the amount of mortgage-backed securities by $5 million. The economists’ strategy is to protect the best of both of these purchases by practically eliminating Treasury Bond purchases while still purchasing newer mortgage-backed securities. The Fed is known to pay attention to any research or information introduced at the meeting for central bankers, so this information is important preceding the Fed’s planned meetings on September 17th and 18th of next month.
The paper presented offers 3 steps to protect mortgage interest rates while reducing federal debt. These steps are listed below.
Step #1: These economists claim that buying Treasuries is not having much of an impact on the economy. They suggest that the Fed stop buying Treasuries altogether and start selling some of the government debt which has gone up over the last 4 years.
Step #2: Also, instead of buying mortgage-backed securities each month in order to bolster the housing market, they urge the Fed to sell older, dated mortgage-backed securities whose sale would have practically no effect on mortgage rates.
Step #3: The first two suggestions argue to stop buying and start selling, the third step in their program would be to continue buying newer mortgage-backed securities. They say that this is the Fed’s most powerful tool and “most beneficial source of economic stimulus,” and should only stop as a last resort.
However the Fed decides to move forward, prospective home buyers, home buyers, and people interested in refinancing should take advantage of the still, historically low interest rates.
