“Quantitative easing” is aimed at greasing the wheels of the credit markets
The Federal Reserve announced on Monday that it will buy unlimited amounts of Treasuries and agency mortgages, including multifamily, to grease the wheels of the credit markets.
The purchases are attempts to avoid the type of credit crunch seen after the collapse of the financial system in 2008.
Monday’s announcement came eight days after Fed Chairman Jerome Powell said the central bank would restart a quantitative easing, or QE, program created a decade ago. It was slated to be $700 billion in bond purchases, but within the first week, the market specialists who execute those purchases had burned through half of that.
The new move to make unlimited purchases is intended “to support the flow of credit to households and businesses by addressing strains in the markets for Treasury securities and agency mortgage-backed securities,” the Fed said in a statement before stock markets opened on Monday. “The Federal Reserve will continue to purchase Treasury securities and agency mortgage-backed securities in the amounts needed to support smooth market functioning.”
The bond-buying is aimed at providing liquidity and pushing rates lower, which would bolster the economy. The first QE program, announced in December 2008, drove mortgage rates below 5% for the first time ever. This time, it could drive rates below 3%.
Market disruptions have caused some lenders to add a risk premium to mortgage pricing in recent weeks, causing interest rates to rise.
When things settle down, rates could settle down as well, Frank Nothaft, CoreLogic‘s chief economist, told HousingWire last week.
“It may not be tomorrow or next week, but I think longer term as we look to the spring, yes, I think we could see rates moving down to new lows and possibly below 3%,” Nothaft said. “It’s certainly possible.”
Following this morning’s Fed announcement, the NY Fed issued a statement revising its mortgage-bond purchase schedule issued last week.
The bond purchases probably will total at least $125 billion a day, it said. “The desk plans to conduct operations totaling approximately $75 billion of Treasury securities and approximately $50 billion of agency MBS each business day this week, subject to reasonable prices,” the New York Fed said.
“The desk will begin agency CMBS purchases this week,” it said, referring to commercial mortgage-backed securities, without citing a target amount.
In the last week, the Fed has resurrected many of the measures it used during the 2008 financial crisis. It cut interest rates to near zero, re-launched QE bond-buying and opened emergency lending windows to support commercial paper issuers and money market funds.
It has also added new tactics – such as Monday’s announcement that it would buy agency-backed commercial mortgages, which typically are used to build apartment buildings.
The Fed also said it would set up programs to ensure credit flows to corporations and state and local governments. That includes buying municipal debt, which will provide cash to the communities who are on the front lines of the COVID-19 pandemic.
“The Depression was about the Fed moving too slowly,” Neil Dutta, head of economics at Renaissance Macro Research, told Bloomberg News. “We are seeing a lot of things today. But, a slow-moving Fed hasn’t been one of them. That’s encouraging.”
