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Editorials

September 21, 2012

Fed can only do so much on its own

Federal Reserve Chairman Ben Bernanke last week unveiled the third round of quantitative easing, the controversial bond-buying program designed to ease the balance sheets of participating banks and free up credit for those seeking to start or expand a business.

The plan, called QE3, differs from earlier versions in that the Fed is aiming specifically to boost the housing market by purchasing $40 billion a month in mortgage-backed securities. The housing market appears to have hit bottom, and the Fed hopes to spark demand for housing by driving already-historically low mortgage rates even lower.

Of course, QE3’s success depends on the willingness of banks to pass along lower rates to consumers, a dubious proposition given the lack of consumer demand. And as the Financial Times reported Sunday, many banks are too understaffed to process mortgage applications quickly and have no interest in hiring more mortgage writers until the job market improves.

“Very little of that is likely to make it through immediately to consumers,” Deutsche Bank MBS analyst Steven Abrahams said bluntly. “There’s nothing that will force mortgage originators themselves to lower the rates that they’re offering to consumers.”

As with any plan that loosens the money supply, QE3 entails the chance of higher inflation. But such worries about the first two rounds of quantitative easing proved greatly exaggerated. And the fear that Fed’s policy is actually a “stealth tax” on those who save is misplaced; as Bernanke noted, savings yields are lowest when one has no job and no money to save.

But as imperfect as his options are, Bernanke has responded to a tepid economic recovery with bold action. The same can’t be said for a Congress bogged down in election-year gridlock. With the $1.2 trillion “fiscal cliff” of tax hikes and spending cuts looming Jan. 2, Moody’s Investors Service said last week that it’s prepared to downgrade its rating on U.S. government debt if budget negotiations fail.

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