Support Marketplace

Debts mounting on Fed balance sheet

The Federal Reserve Building in Washington, D.C.

TEXT OF STORY

Kai Ryssdal: On the list of the things that are not going to happen over the next 48 hours, I think you can safely put an interest-rate increase from the Federal Reserve. The Fed's Open Market Committee meets tomorrow. That's the group in charge of setting those short-term interest rates. There's no sign Mr. Bernanke and company are thinking of moving the federal-funds rate from where it is right now -- a quarter of 1 percent. What will happen instead is that the markets and analysts galore will be paying very close attention to what the Fed says about how else it will keep propping up the economy. One of the big ways it's done that so far is by buying up debt. And as a result, Marketplace's Steve Henn reports that in the past six months the Fed's balance sheet has been completely transformed.


STEVE HENN: Six months ago this week, the Fed started buying up mortgage-backed securities. And since then, it's bought about half-a-trillion dollars worth, as well as $100 billion in debt issued by Fannie Mae and Freddie Mac.

That's roughly enough cash to pay for the overhaul of the health-care system for the next six years.

So why is the Fed spending this money?

JAMES HAMILTON: All of these unconventional measures are intended to something about the spreads between different interest rates.

James Hamilton is economics professor at the University of California San Diego. He says in the old days, the Fed would set its target interest rate and let the markets work out what to charge home buyers or car buyers.

But the spread between the Fed's rate and what consumers were being charged by banks was so big, the Fed started intervening to force rates down. Jerry Caprio is a professor of economics at Williams College.

JERRY CAPRIO: The easing that the Fed has done since this crisis began certainly has kept us out of a far, far worse situation than we would have been encountered otherwise.

But Caprio doesn't think the Fed's addressed the root of our economic problems. He says we are a nation swamped in debt struggling to make our payments. And now James Hamilton argues if you or I can't make a mortgage payment it could be the Fed that takes the loss.

JAMES HAMILTON: That's exactly right. The Fed has assumed essentially on behalf of taxpayers a certain degree of risk.

And the Fed may not be done yet. It's announced plans to buy another $600 billion in mortgage-backed securities by the end of this year.

In Washington, I'm Steve Henn for Marketplace.

About the author

Steve Henn was Marketplace’s technology and innovation reporter for the entire portfolio of Marketplace programs until December 2011.

Comments

I agree to American Public Media's Terms and Conditions.
With Generous Support From...