Fed's plan moves mortgage market

Traders signal offers in the Standard & Poor's 500 stock index futures pit at the CME Group in Chicago, Ill., after the Federal Reserve announced plans to stimulate the economy.

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BOB MOON: Wall Street, meantime, was keeping its focus on a different kind of fallout. Of course, we talk a lot about fallout on this show -- the fallout from the financial crisis. Well, today it was fallout from the Federal Reserve's latest move.

Yesterday's announcement: That it would increase its balance sheet by $750 billion and use the money to buy more mortgage-backed securities. Add another $100 billion worth of agency debt to the shopping cart as well. And throw in another $300 billion of long-term Treasury bonds. Marketplace's Jeremy Hobson has this look at the consequences of all that.


JEREMY HOBSON: The Fed said the moves were designed to provide greater support for mortgage lending. And they did. Holden Lewis of Bankrate.com says rates for most borrowers dropped overnight from about five-and-a-quarter percent to 5 percent.

HOLDEN LEWIS: What the Fed is wanting to do is to encourage people to refinance so they can save money, spend that money elsewhere and stimulate the economy.

But print all that money, and there's bound to be some impact on the dollar, right?
Here's Brian Dolan, chief currency strategist with Forex.com.

BRIAN DOLAN: We're looking at three to five percentage point movement in 24 hours which is a pretty significant movement.

Dolan says concerns about inflation drove the dollar down by several cents against the euro and the yen. Inflation concerns also tend to impact commodities that are bought and sold in dollars, like gold and oil. On the trading floor in Chicago, Alaron's Phil Flynn says despite weak demand and heavy supply, traders had no choice but to pump up the price of crude.

PHIL FLYNN: You can't beat the Fed. They can print dollars faster than I can so now for me to bet on lower oil prices, it's a lot more of a dangerous proposition no matter how dreary I think the demand outlook is.

Now, these things might seem like unpleasant side effects of the Fed's action. I mean, the Fed never stated a desire to drive up oil prices. But former Fed Economist Morris Davis -- now at the University of Wisconsin -- says they know just what they're doing.

MORRIS DAVIS: The Fed wants to inflate, so the increase in the price of oil and the devaluation of the dollar -- that is an intended consequence.

No surprise to anyone who's been listening to Fed Chairman Ben Bernanke recently. He's said he's more concerned with deflation than inflation. Davis says the worry now is, once printing money is the strategy, how do you know when to stop?

In New York, I'm Jeremy Hobson for Marketplace.

About the author

Jeremy Hobson is host of Marketplace Morning Report, where he looks at business news from a global perspective to prepare listeners for the day ahead.

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