On September 12, 2012, Jim Puzzanghera and E. Scott Reckard writes that plans are expected for a third round of a controversial bond-buying program.
Federal Reserve Chairman Ben S. Bernanke is poised to roll out another stimulus program — and risk the wrath of conservative critics.
Economists said the move could help boost the economy if the Fed focuses its efforts on the slowly improving housing market. By buying mortgage-backed securities, it could edge down already historically low borrowing rates.
Lower rates also could make banks more likely to lend because it would be easier to sell the loans to the Fed and avoid risks of losses. That, in turn, could help stimulate economic activity and help create jobs.
And those low rates, which the Fed has promised to extend at least through 2014, could be keeping businesses from borrowing now because they know they’ll have access to cheap money for a long time.
But with the economy still struggling to create jobs, Bernanke and other Fed officials have signaled that they’re ready to act. And though short-term interest rates are near zero, another large-scale bond-buying effort would be the central bank’s main weapon.
Lower rates make home purchases more affordable, supporting the troubled housing market, and enable homeowners to refinance into loans with lower payments, stimulating the economy by leaving more money in their pockets to spend on other items.
Banks making the loans “aren’t passing it on to consumers,” said Scott Simon, head of the mortgage-backed securities team at Pimco, the giant Newport Beach bond trading firm. “Rather, they are making even more money.”
Also at its meeting, the Fed is expected to extend the period it intends to keep short-term interest rates near zero into 2015.
But Chessen said the Fed’s “abnormally low rates” are discouraging businesses — already worried by the European debt crisis, the slowing global economy and the uncertain U.S. recovery — from taking risks that would help heal the economy.
“Businesses have no urgency to borrow because they know rates will be low for so long,” Chessen said.
http://www.latimes.com/business/la-fi-fed-stimulus-20120912,0,5665948.story
