News Column

Will More Stimulus by Fed Be Helpful?

December 12, 2012

By Paul Davidson


The Federal Reserve today is widely expected to announce plans to buy more Treasury bonds to keep long-term interest rates low and speed economic growth.

But will it matter?

Borrowing costs for home buyers, car shoppers and businesses are already near historic lows. Yet many borrowers face tight credit standards.

Many businesses are holding off investing and hiring because of concerns about the "fiscal cliff," a package of tax increases and spending cuts effective Jan. 1. If the White House and lawmakers don't avert the cliff, another recession is likely.

"I don't think (Fed action) makes a huge difference," says Nigel Gault, chief U.S. economist of IHS Global Insight. "But it's a question of: Do they do something rather than nothing? It probably is best to do something."

The Fed is being nudged into providing more stimulus because Operation Twist, a program aimed at lowering borrowing costs, ends this month. Under that initiative, the Fed, since 2011, has bought $45 billion a month in long-term Treasuries and sold the same amount in short-term Treasury notes. The Fed doesn't have enough short-term bonds to continue the program, so many economists expect it to simply buy $45 billion a month in Treasuries.

The new program would add to the $40 billion a month in purchases of mortgage-backed securities that the Fed began several months ago to reduce mortgage rates.

Yet many consumers don't qualify for mortgages, because their credit scores are low or their home values have fallen. Gault says that while some businesses may take advantage of low interest rates to buy more factory gear or expand, many simply refinance loans to cut borrowing costs.

Still, Tim Duy, a University of Oregon economics professor, says keeping mortgage rates low should spark some additional home purchases.

Source: Copyright USA TODAY 2012

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