Was the Fed Right After All? - Q3 Reports Suggest Bernanke May Have Been Onto Something

by 19 Oct 2012

There’s been much frustration in the past two years with the actions and proclamations of the Federal Reserve Bank, with a particularly strong chorus of outrage directed at Chairman Ben Bernanke. An understandable pattern, as the Fed dipped its toe in some radical waters with the historical lowering of our national interest rate. However, did the Fed’s economic gambles provide positive returns after all?

According to new analysis from Wall Street Journal contributor Michael S. Derby, certain trends are emerging that suggest the Fed’s targeted assistance of the housing market is genuinely encouraging a rebound. Quoting assertions from Columbia Management economist Zack Pandl, signs point towards much of the sector re-stabilization coming from “the cumulative effect of the five-year-long easing campaign.”

Naturally these claims will arouse skepticism with many finance observers, particularly among those who’ve long been averse to Federal intervention in the U.S. economy.

That being said, the arguments aren’t unconvincing. Keeping in mind that macroeconomics is rarely a single-factor game, it seems the Fed’s ongoing asset-buying efforts are easing some of the strain in the worn-out housing market. The government announced last Wednesday that not only did new home building levels climb to a four-year high in September, but they were accompanied by a nearly 12% rise in new building permits.

Private sector voices have begun offering cautious support as well, with a recent statement from banking player BNP Paribas claiming, “The recent turn in housing momentum suggests the marginal impact of open-ended [bond buying] may not, in fact, be smaller than prior easing programs.” In tandem with the newfound support for its mortgage-buying program, the Fed has announced intentions to expand its standing policy of asset purchases, embarking on what has been termed an open-ended program of bond buying.

This will naturally hearten supporters of the Federal Reserve Bank’s standing policies, and hopefully provide some solace to housing players and major investors. Exempting some real estate safe havens, the housing market has been rocky at best – and outright hostile to investment at worst. Either way, it seems Bernanke plans to stay the course, as the central bank will likely extend its bond-buying for another half year, with duration beyond that point highly likely. Expressing his own pointed caution, Bank of America Merrill Lynch economist Michael Hanson admonished that the central bank has “the good fortune the housing market is showing signs of life when they are trying to stimulate the housing market… [but] this doesn’t really change the Fed’s assessment.”

When all is said and done, it seems that claims of a full “rebound” are premature, with the only standing certainties being current signs of improvement matched with foreknowledge that the Fed will have to add even greater sums to its current balance sheet. How this plays out for tomorrow’s housing market is yet to be determined.


  • by William Matz | 10/23/2012 2:14:18 PM

    To focus the inquiry of the effects of QE just on housing is far too narrow and misleading. Of course, lower rates provide a stimulus to the housing market. But to what extent are the low rates hurting the ecconomy, including housing? And might today's low rates be setting up a future housing bust? Here are a few thoughts on those issues.

    The flip side of the benefits of low rates to borrowers is the damage to savers, especially seniors. How many potential buyers are disqualified because their interest income has dried up and or their pension income has decreased or even collapsed due to low yields? How much damage is there to the economy from lower spending due to the huge drop in interest income? And how many jobs (and potential buyers) have been lost due to the dampened consumer spending?

    In the future will much of our market be frozen in place due to having fixed rates that are half or less of the "normal", higher rates? (Remember 1980-82? Virtually the only sales were all cash or assumptions.) The unresolved issue is the extent to which today's low rates will distort tomorrow's market, decreasing mobility, just as today's underwater houses do.

    Therefore, I believe it is short-sighted to look just at QE's effect on housing. Are today's low rates just the housing version of "Cash for Clunkers"? There is a real danger that the double whammy of the expected future higher interest rates and higher materials costs could well result in another housing bust. But there are the others who project that we will have a low rate, stagnant growth environment, possibly for decades. Who knows?, But neither scenario is ver appealing.


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