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Kai Ryssdal: The Federal Reserve is meeting on interest rates today and tomorrow. Sort of can’t believe I’m saying this, but it would be interesting to be a fly on the wall there for a little while. Because since interest rates are already basically at zero, the Fed can’t really do much else with its traditional tools that it uses for guiding the economy.
But Chairman Bernanke and his colleagues have been trying some other tricks to encourage the flow of money through the financial system. Even though there is probably not going to be an interest-rate announcement when the meeting wraps up tomorrow, people are going to be watching what else the Fed says to figure out what it’s going to do. Marketplace’s John Dimsdale reports now from Washington.
JOHN DIMSDALE: Since last fall, the Fed has been trying to prime the economy’s lending pumps by buying mortgages and other consumer credit loans. The Fed is betting that when lenders get more cash, they’ll offer cheaper mortgages and bring down housing costs. For a while, mortgage interest rates fell from above six percent. But Morgan Stanley’s Ted Wieseman says that stopped.
TED WIESEMAN: Thirty-year mortgage rates for consumers have been stalled at a little over five percent. I think the Fed and the Treasury would like to get that down towards four and a half. And the question is what’s the best way to do that.
Wieseman thinks the Fed should try a new strategy: buy Treasury bonds. The yield on Treasuries has been rising recently, which puts upward pressure on mortgage rates. By buying hundreds of billions of dollars of government bonds, the Fed could lower their cost and keep mortgage rates under control. But Gerald O’Driscoll, a former Dallas Fed vice president, says it’s going to take more than lower interest rates to get money moving again.
GERALD O’DRISCOLL: The Fed is doing what it can do, but it’s not the problem. I think it’s pretty clear now that even when you flood the banks with liquidity, many are reluctant to loan especially to each other.
O’Driscoll says banks are burdened with too many bad assets to start taking risks with new loans. And clearing up toxic assets isn’t under the Fed’s jurisdiction. O’Driscoll says there’s a risk in buying Treasury bonds by artificially pushing down interest rates. The Fed won’t be able to see early signs of inflation — once the economy turns around.
In Washington, I’m John Dimsdale for Marketplace.