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U.S. Federal Reserve Chairman Ben S. Bernanke

Tomohiro Ohsumi/Bloomberg

U.S. Federal Reserve chairman Ben S. Bernanke.

U.S. Federal Reserve chairman Ben S. Bernanke. Photographer: Tomohiro Ohsumi/Bloomberg

 

Sept. 21 (Bloomberg) — Tom Porcelli, chief U.S. economist at Royal Bank of Canada’s RBC Capital Markets unit, and Daniel Yergin, co-founder of IHS Cambridge Energy Research Associates, talk about Federal Reserve policy and the U.S. economy.
They speak with Tom Keene on Bloomberg Television’s “Surveillance Midday.” (Source: Bloomberg)

 

Sept. 21 (Bloomberg) — U.S. Senator Charles Grassley, an Iowa Republican, discusses Federal Reserve monetary policy.
Grassley, speaking with Betty Liu on Bloomberg Television’s “In the Loop,” also talks about Google Inc. Chairman Eric Schmidt’s appearance in a Senate hearing today focusing on whether the company engaged in anticompetitive practices. (Source: Bloomberg)

 

Sept. 21 (Bloomberg) — David Semmens, U.S. economist at Standard Chartered Bank, discusses the prospects for the Federal Reserve to launch “Operation Twist,” which would replace short-term Treasuries in the Fed’s $1.65 trillion portfolio with long-term bonds, and its potential impact on the U.S. economy.
Semmens speaks with Deirdre Bolton and Erik Schatzker on Bloomberg Television’s “InsideTrack.” (Source: Bloomberg)

 

Sept. 21 (Bloomberg) — Tom Vosa, head of market economics in Europe at National Australia Bank Ltd., and Peter Dixon, global equities economist at Commerzbank AG, debate the prospect of the Federal Reserve buying longer-maturity debt in a move dubbed “Operation Twist.”
They speak with Maryam Nemazee on Bloomberg Television’s “The Pulse.” (Source: Bloomberg)

 

Sept. 20 (Bloomberg) — James Caron, head of global interest-rate strategy at Morgan Stanley, talks about the outlook for Federal Reserve policy.
He speaks with Lisa Murphy on Bloomberg Television’s “Fast Forward.” (Source: Bloomberg)

U.S. mortgage rates are the lowest
in at least four decades, with a 30-year fixed loan available at
4.09 percent. That didn’t help Alexis Wolf buy a townhome in
Beaverton, Oregon.

“Unless you have family help, you’re stuck renting,” said
Wolf, 26, a real estate broker who turned to relatives for a
loan because she didn’t have the credit and employment history
needed to qualify for a mortgage.

Wolf’s experience illustrates the predicament for Federal
Reserve policy makers as they end a two-day meeting today to
consider ways to boost economic growth. Low interest rates, the
traditional medicine for a flagging economy, aren’t helping
housing, which since 1982 has aided every recovery except the
current one.

Sales of existing homes rose more than forecast in August
to a 5.03 million annual pace as investors used cash to buy
distressed properties, a report today from the National
Association of Realtors showed. The sales pace has fallen from a
peak of 7.08 million in 2005, before the housing boom turned
into a subprime-mortgage bust that helped drag the U.S. into an
18-month recession.

Rising foreclosures, tighter lending standards and
unemployment stuck near 9 percent for more than two years are
all weighing on the market. Lower borrowing costs aren’t likely
to make a difference, said housing economist Brad Hunter.

‘Extremely Attractive’

“The Fed’s actions probably won’t help housing in a
meaningful way,” said Hunter, chief economist and national
director of consulting at Metrostudy, a Houston-based housing
research firm that provides data to 18 of the 20 largest U.S.
builders. “The level of mortgage rates is not a major factor.
Rates are at extremely attractive levels.”

The Federal Open Market Committee may decide today to
replace short-term Treasuries in its $1.65 trillion portfolio
with long-term bonds in a bid to lower rates for mortgages, auto
and consumer loans, according to 71 percent of 42 economists
surveyed by Bloomberg News.

Economists at Goldman Sachs Group Inc. (GS) and JPMorgan Chase &
Co. (JPM) say policy makers may also choose to reduce the 0.25 percent
interest rate paid on the excess reserves that banks hold at the
Fed. The central bank is scheduled to issue its statement at
about 2:15 p.m. in Washington.

The FOMC may say that while recent data are consistent with
a rebound forecast for the second half of 2011, the weak labor
market and high unemployment make more easing necessary, said
Dean Maki, chief U.S. economist at Barclays Capital.

Boom-Bust Cycle

“It is hard to argue that what is holding the recovery
back is the level of interest rates,” Maki said. “We have been
through a massive boom-bust cycle in housing,” and working off
excess inventory will “be a long, drawn-out process.”

Republican lawmakers such as Senate Minority Leader Mitch McConnell and House Speaker John Boehner urged Fed Chairman Ben S. Bernanke to refrain from additional monetary easing to avoid
“further harm” to the economy, saying Americans have reason to
be “skeptical” of his plans, including a program to purchase
bonds known as quantitative easing.

Bank of England officials said they may need to step up
quantitative easing to aid a faltering recovery after forgoing
more stimulus this month in a “finely balanced” decision.

A rebound in U.S. housing is essential for restoring the
net worth of households, reviving consumer spending and
strengthening the recovery, Harvard University economics
professor Martin Feldstein said in a Sept. 14 interview. Neither
monetary policy nor President Barack Obama’s proposed $447
billion jobs program will provide a fix, he said.

‘Month After Month’

“The most important thing that would stimulate households
would be to go after the housing problem,” said Feldstein, who
served as chief economic adviser to President Ronald Reagan.
“We still have house prices falling month after month on a
seasonally adjusted basis, and something has to be done to deal
with that.”

Tougher lending standards imposed after the credit crisis
are impeding a recovery in housing more than the cost of
borrowing, Hunter said.

Commercial banks’ real estate loans have fallen as
supervisors, including the Fed, set rules aimed at preventing
excessive risk-taking and predatory lending. Those loans have
dropped for 29 consecutive months, according to Fed data.

“Regulators are still busy fighting the last war and
demand that bankers be ultra cautious about lending,” said
Charles Lieberman, chief investment officer with Advisors
Capital Management LLC in Hasbrouck Heights, New Jersey and a
former head of monetary analysis at the Federal Reserve Bank of
New York.

Benchmark Rate

The Fed has held the benchmark interest rate near zero
since December 2008 and expanded the central bank’s assets in
July to a record $2.88 trillion. The yield on the 10-year U.S.
Treasury note has declined to 1.94 percent from 4 percent in
April 2010.

Still, economic growth in the first six months of this year
was the weakest since the recovery started in 2009. Gross
domestic product expanded at a 1 percent annual rate in the
second quarter after 0.4 percent growth in the first three
months of this year.

The Fed, by announcing today the lengthening in the average
duration of bonds in its portfolio, would mimic a policy in 1961
known as “Operation Twist” for its goal of bending the yield
curve. Within the first month, the program may push down the
yield on the 10-year Treasury security by 0.15 percentage point,
said Chris Rupkey, chief financial economist of Bank of Tokyo-
Mitsubishi UFJ Ltd. in New York.

Sixties Version

“Operation Twist in the ‘60s wasn’t found to be a great
success either,” said Robert Shiller, an economics professor at
Yale University and co-creator of the S&P/Case-Shiller home-
price index.

“Homeowners are relatively insensitive to mortgage rates
when they are lacking confidence,” he said. “The dramatic
thing that is happening now is that their job isn’t secure, if
they even have one.”

Consumer confidence has fallen along with U.S. home values,
which have declined by a third over the past five years,
according to the S&P/Case-Shiller U.S. Home Price Index. In
speculative markets like south Florida, home values have tumbled
by half. During just the past 12 months, the value of real
estate assets has declined by $947 billion.

Consumer confidence has ebbed to the second-lowest level of
the year as the most households in three years said it is a bad
time to spend. The Bloomberg Consumer Comfort Index was minus
49.3 in the period to Sept. 11, near this year’s low of minus
49.4 reached in May.

‘Essence’ of Problem

“The essence of the problem is there’s no confidence in
what’s next with the economy,” Jeff Lazerson, president of
Mortgage Grader Inc., a mortgage broker based in Laguna Niguel,
California, said in a telephone interview. “Borrowers are
unemployed or worried about losing their job. Even rich guys
feel poor when the stock market goes down.”

The Standard & Poor’s 500 Index has lost 4.4 percent this
year, closing yesterday at 1,202.09 in New York. Net worth for
households and non-profit groups decreased by $149 billion in
the second quarter, a 1 percent drop at an annual pace, to $58.5
trillion, the Fed said Sept. 16.

Wolf, the real estate broker and Oregon homebuyer, said a
Fed program to push down interest rates probably wouldn’t bring
her more business.

“If they were even lower, I’m not sure people jump into
the market,” she said. “I don’t think they’re a function of
holding people back, like unemployment or uncertainty in the
economy.”

To contact the reporters on this story:
Steve Matthews in Atlanta at
smatthews@bloomberg.net;

To contact the reporter on this story:
John Gittelsohn in Los Angeles at
johngitt@bloomberg.net

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