Fed explores investing in new mortgage bonds

Federal Reserve Chairman Ben Bernanke

TEXT OF STORY

Steve Chiotakis: Consumer spending and incomes in this country didn't go anywhere in June. Analysts had expected a small gain. But the Commerce Department says personal savings are at their highest level in a year. That doesn't bode well for an American economy that relies on consumers to keep the engine going.

And that leads us to today's big question: Is it possible for the Federal Reserve to jumpstart a stalled recovery? A new report says the Fed's looking at a few options to get the economy back on track. One idea that's gained some speed is pouring more money into new mortgage bonds as old ones the Fed had bought begin to mature. Reporter Jon Hilsenrath wrote the article for this morning's Wall Street Journal, he's with us live from New York. Good morning Jon.

Jon Hilsenrath: Good morning.

Chiotakis: So the Fed initially said it was going to let the money it had invested in these mortgage bonds shrink, the amount of money right? Why the change of heart?

Hilsenrath: Well, so you know, they spent a lot of the beginning of this year talking about their exit strategy. It looked like the economy was back on track. We had a couple months of pretty strong job growth in March and April. And so they were looking at pulling back the reigns of the economy. The last couple of months, some of the data has looked pretty soft -- the job market never really got traction. Consumer confidence is down, consumer spending has softened a bit. And so they're trying to, they're moving freom an exit mode to try to think through what their re-entry mode would be like. The first step would be not shrinking their balance sheet. So they were going to let these mortgage bonds roll off, now they're thinking all right, you know what, maybe we should just keep re-investing what we've got to keep the money that we have in the economy still there trying to do the work that it does.

Chiotakis: Keep the investment going. So what else is on the table, Jon?

Hilsenrath: Well so, this move of reinvesting mortgage bond proceeds is pretty small in terms of the economic impact, but symbolically it would be important, because it would signal the Fed's concern about the economy. There's a few other things they can do. They can use their language, the bully pulpit so to speak, to explain to investors and the public that interest rates, which are already near zero, are going to stay there for a really long time. The hope would be that that would encourage more risk-taking by business, by households, with the understanding that business rates are going to stay low for awhile.

Chiotakis: Hey John, how exactly, and real quick, how exactly do any of these plans help the economy? I mean pumping more money into bonds or Treasuries, what does that mean to the guy who doesn't have a job?

Hilsenrath: Well you know, you're asking the question that Ben Bernanke is asking right now, and the problem is everything that they're doing is unconventional at this point, so they're not sure how it helps the economy. You know, they have their theories about how it does. The idea it helps to keep interest rates low, which provokes more borrowing, more investment by business, which could create jobs, but these are very unconventional tools and they're very uncertain about how well they'll work.

Chiotakis: Yeah, we're going to have to wrap it up there, Jon, we're out of time. But thank you so much, we appreciate it. Reporter Jon Hilsenrath, reporter for the Wall Street Journal. Thanks for the time.

About the author

Steve Chiotakis was the host of Marketplace Morning Report until January 2012.

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