mortgage

Fed leaves interest rates unchanged

At this point, another recession would be devastating to the U.S. economy. As painful as the yield drought is to savers, interest rate policy is dictated by the economy. Theoretically, ultra-low interest rates should encourage more borrowing and spending by businesses and individuals.

"The weak U.S. economy is not only the primary determinant of what is happening with interest rates, it's also the main pocketbook issue for Americans," McBride says.

"If we have another recession, a couple million Americans will lose their jobs and retirement accounts will take a further hit," he says.

QE deja vu

The Federal Reserve has taken two stabs at economic stimulus previously. In 2008, the Fed announced plans to purchase bonds from government-sponsored enterprises along with mortgage-backed securities. The asset purchase plan was expanded in the spring of 2009 and purchases ended at the end of the first quarter in 2010.

In November 2010, the second round of quantitative easing, or QE2, was launched, in which $600 billion of Treasury securities were purchased through June 2011.

The main tool available to the Federal Reserve is the federal funds rate, or the short-term interest rates banks charge one another for borrowing overnight. With interest rates at virtually zero since December 2008, the only way the central bank can stimulate the economy will be through further asset purchases.

According to Gramley, the Fed's options going forward include buying new securities to replace maturing securities bought under the asset purchasing program, extending the maturity of their holdings by replacing maturing securities with issues of longer maturity, or engaging in another round of quantitative easing.

The question is: How effective will any of those be?

"If I had to guess, I would say that any one of those things, or all of them put together, (is) going to add no more than a few tenths of a percentage point to growth next year. What we need are a couple of percentage points of growth -- more than is likely to be in the cards," says Gramley.

The FOMC will meet again Sept. 20, but an economic symposium in Jackson Hole, Wyo., is coming up in late August, at which more information on economic policy may be forthcoming.

 

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