Fed Hopes to Lower Interest Rates, But Will It Help?

In order to “support a stronger economy” and keep inflation at the right level, the Federal Reserve decided today to purchase bonds with longer maturities, while selling off its shorter-term bonds, in hopes that long-term interest rates will continue to fall.

The Federal Open Market Committee announced that it will buy $400 billion worth of Treasury securities with maturities of six to 30 years, over the next eleven months. It will simultaneously sell off an equal amount of its Treasuries that mature within three years or less.

“This program should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative,” the FOMC said in its press release. “The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.”

The goal is that interest rates will be pushed down further, making it easier for companies, consumers, and home buyers to invest in big purchases, propelling the economy forward. This goes along with what the Wall Street Journal quoted Fed President Ben Bernanke as having said last year — that one of his goals was to create “lower mortgage rates [that] will make housing more affordable and allow more homeowners to refinance.”

Yet there is skepticism as to whether long-term rates really will fall much more and whether lower rates would really help the economy. In terms of mortgage rates, while they are pretty tied to the direction of Treasury yields, it is not an exactly perfect relationship. They now have a much wider spread from Treasury yields than they did just six months ago.

Then again, mortgage and other lending rates are right at or near historic lows. Low rates alone have not been able to stir up the needed business. Tight lending standards and weak consumer financial profiles have been limiting market access to these amazing rates. It seems as though the Fed is running out of tools in its hands to influence the economy and is just trying anything at this point.