Federal Reserve Bank of Boston President Eric Rosengren called for more government efforts to help homeowners refinance their mortgages while saying the Fed’s plan to buy longer-term securities will probably spur growth.
Consumption will rise and gross domestic product will expand after more borrowers refinance and reduce their mortgage payments, Rosengren said today in a speech in Stockholm. “Getting more money into the hands of homeowners who would spend it could help to fuel GDP growth,” he said.
The central bank decided last week to purchase $400 billion of longer-term Treasuries and sell $400 billion of short-term securities in a move known as Operation Twist after a similar effort in the 1961. Rosengren said he was “very supportive” of the program. He also endorsed a related plan to reinvest maturing housing debt into agency mortgage-backed securities, which he said should also help revive the real estate market.
Hours earlier, Dallas Fed President Richard Fisher said the plan to cut longer-term interest rates risks proving ineffective and may hurt job creation. It was “a strategic decision where I did not feel the benefits outweighed what I perceived to be the costs,” Fisher said yesterday in a speech in Dallas.
The average rate on a 30-year fixed rate mortgage was a record low 4.09 percent as of last week, according to an index from Freddie Mac, down from 5.05 percent earlier in the year. Although borrowing costs are low, home prices fell 4.1 percent from a year earlier in July, according to the S&P/Case-Shiller index of property values in 20 cities, released yesterday.
“The Federal Reserve should continue to closely monitor spreads between mortgage and Treasury yields and consider taking action if that spread widens significantly,” Rosengren said at the Swedbank Economic Outlook Seminar.
The Standard & Poor’s 500 Index of stocks fell 0.2 percent to 1,173.57 at 10:30 a.m. in New York trading. Yields on 10-year Treasury notes rose three basis points, or 0.03 percentage point, to 2 percent.
Damage to the housing market is hindering the efficacy of monetary policy, he said.
“Falling home prices have not only impaired the capital of many financial institutions, but in a very real sense have disrupted the transmission of monetary policy,” Rosengren said. He called for a stepped up role for the government-owned mortgage-finance companies Fannie Mae and Freddie Mac, also known as government-sponsored enterprises or GSEs.
“There should be strong encouragement for the GSEs to focus on the housing recovery so home buyers and those that already have loans can fully benefit from the lower interest rates generated by our monetary policy action,” Rosengren said.
“Given that Fannie Mae and Freddie Mac are currently under conservatorship by the U.S. government, I believe they should play a larger role in achieving the public policy goals inherent in addressing these housing-market problems,” he said.
Rosengren called for steps to help borrowers refinance even if their mortgages exceed the value of their homes. The government should also try to reduce the supply of vacant homes and clarify its policy toward housing, he said.
Though hampered, monetary policy should still be used to help reduce unemployment, he said.
“While monetary policy cannot fully offset the many problems stemming from the recession, it can certainly mitigate some of the effects,” Rosengren said.
“A policy action that, for instance, reduces the unemployment rate by half a percent over time will not return the economy to full employment, of course, but will still mean 750,000 jobs that would not have been created in the absence of the action,” he said.
“With unemployment at 9.1 percent and with inflation in the medium term expected to remain below 2 percent, monetary and fiscal policies should be focused on returning the economy to full employment,” he said.
Rosengren, 54, joined the Boston Fed as an economist in 1985 and became its president in 2007. Fed presidents rotate voting on monetary policy, with Rosengren next voting in 2013.
At the Fed’s December 2007 meeting, Rosengren became the only currently serving policy maker to dissent from an FOMC decision in favor of more accommodative policy.
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