(Source: Chicago Tribune)
WASHINGTON _ The Federal Reserve escalated its war on the nation's credit crisis Wednesday, announcing that it would more than double the amount of money it will spend in the coming year in an aggressive effort to force down interest rates on mortgages _ perhaps by as much as 1 percentage point _ as well as other business and consumer loans.
The move, which cheered the markets, is designed to keep money flowing through the economy's clogged credit arteries to foster economic recovery.
"They are trying to fire absolutely every weapon they can," said Nigel Gault, chief U.S. economist at IHS-Global Insight, a Lexington, Mass.-based forecasting firm. "It improves the odds that we'll bottom out in the second half of the year."
David M. Jones, a former Fed economist and president of DMJ Advisors, a Denver-based consulting firm, said he expects the Fed actions to help lower conventional mortgage rates from their current level of just below 5 percent, perhaps to near 4 percent.
"I've never known when the Fed has taken a move this powerful in easing monetary policy," Jones said. "If you bring the interest rate down that much, we'll have a huge amount of refinancings and that will create money for banks" and help shore up the financial sector.
The news had an immediate impact on Wall Street, where the stock market reversed course and posted a modest rally, and yields on 10-year Treasuries dropped by 0.5 percentage points, to 2.5 percent. Many interest rates, including mortgage rates, are pegged to the 10-year note.
"Bottom line, these actions by the Fed today certainly increase the chances of a housing bottom sometime this year, and a return to economic growth by year end," said Scott A. Anderson, chief economist at Wells Fargo Economics in Minneapolis. "Ten-year Treasury yields plunged by a half a percentage point shortly after the statement, which will drive significantly lower mortgage and corporate bond rates across the country. I sense a refinancing or financing opportunity coming on."
But Guy Cecala, editor of Inside Mortgage Finance, a trade publication, said that many consumers may find that the rates their banks actually offer are higher than they might expect. And that may not change quickly, especially since lenders are already swamped with applications for loan refinancings and modifications.
"If they have all the business they can handle, what's their incentive to lower their rates?" Cecala said. "That has been the challenge the government has faced from Day 1.
