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Fed focuses on consumer and corporate rates
Federal Reserve officials are focused on driving down the spreads between US Treasury yields and consumer and corporate loans, after cutting the main interest rate to almost zero failed to revive lending.
- Bloomberg
- Published: 23:58 January 6, 2009
New York: Federal Reserve officials are focused on driving down the spreads between US Treasury yields and consumer and corporate loans, after cutting the main interest rate to almost zero failed to revive lending.
Credit costs for households and businesses have not followed yields on government debt lower. Fifteen-year fixed-rate mortgages were at 5.06 per cent last week, 2.59 percentage points above 10-year Treasury yields; the spread averaged 0.88 point in 2003, when the Fed slashed rates to 1 per cent.
Chairman Ben S. Bernanke sees the thawing of frozen credit markets as critical to a recovery, and is determined to try to prevent a second wave of credit distress as the US weathers bad economic news over the next two quarters.
The Fed is now looking at ways to revive lending by using its balance sheet to hold loans and bonds that investors don't want.
"Investors in general don't want to take on the risk," said Richard Schlanger, who helps manage $15 billion (Dh55 billion) in fixed income securities at Pioneer Investments in Boston. "It is going to reach the point where the Fed will intervene again."
One of the options under consideration: reviving the asset-purchase plan originally envisaged under the $700 billion Troubled Asset Relief Programme run by the Treasury. The purchases could be combined with fresh injections of capital into banks, and the use of TARP money to help struggling home owners avoid foreclosure.
President-elect Barack Obama's transition team and central bank officials have discussed such a strategy. Obama, who has advocated a broad-based approach to tackling the issue, has picked New York Fed president Timothy Geithner as his Treasury chief, with former Treasury secretary Lawrence Summers as White House economics director.
The Fed may offer further insight into officials' deliberations last month on shifting to using the amount and type of debt the central bank buys as the main tool of monetary policy.
The Fed on Monday began a frontal attack to drive down home-loan costs, buying mortgage-backed securities issued by Fannie Mae, Freddie Mac and Ginnie Mae. The effort was part of a $600 billion plan, which also includes purchases of Fannie and Freddie bonds.
Mortgage rates "should be in the low 4s right now based on Fed rates," said Ben Fox, executive vice- president of Premier Mortgage Co in Fairfax, Virginia. "They are not even close," he added.
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