BLOG VIEW: The Fed Steps In… Twice

With two recent decisions issued that each triggered a dramatic market response, the U.S. Federal Reserve has made its presence known – and potentially begun to quiet criticism that it has weakly addressed, or even neglectfully ignored, the current mortgage crisis and its economic consequences.

First, by a vote of 9-1, the Federal Open Market Committee (FOMC), the policy-setting committee for the Fed, approved a lowering of the target for the federal funds rate 25 basis points, to 4.25%, on Tuesday.

‘Incoming information suggests that economic growth is slowing, reflecting the intensification of the housing correction and some softening in business and consumer spending,’ the Fed explained in its announcement of the rate cut. ‘Moreover, strains in financial markets have increased in recent weeks. Today's action, combined with the policy actions taken earlier, should help promote moderate growth over time.’

‘Over time’ proved to be the operative phrase – as stocks promptly plummeted in response to the announcement and discontented investors called for more aggressive action.

Additionally, some policymakers interpreted the rate cut as a reflection of the failure of previous national economic approaches – as well as an indication that President Bush's recently unveiled subprime mortgage relief plan will be wholly insufficient for restoring the economy via repair of its currently most persistently trouble-making sector: housing, mortgages and associated securities.

‘The Federal Reserve's rate cut is more proof that the Bush Administration economic plan has increased economic insecurity for America's middle-class families,’ Speaker of the House Nancy Pelosi, D-Calif., asserted in a statement. She added that ‘protecting Americans from foreclosure and restoring America's economic strength demands bold action that goes far beyond President Bush's limited response.’

Even some supporters within the housing industry feel the federal government's actions fall short.

While commending the Fed for taking action that recognizes the seriousness of the housing crisis and its effects on the broader economy, the National Association of Homebuilders (NAHB) was quick to add in its statement that numerous other measures are urgently needed to prevent further mortgage meltdown and encourage liquidity in the financial markets:

‘The Senate should move quickly to approve House-passed initiatives that will modernize FHA, provide tax debt forgiveness when the terms of a mortgage are renegotiated and a portion of the loan is forgiven, strengthen the regulatory oversight of the GSEs and allow Fannie Mae and Freddie Mac to purchase mortgages in high-cost markets,’ recommended Brian Catalde, president of NAHB.

Just one day after announcing the rate cut, the Fed made its next market-repair move, introducing a term auction facility program – designed to increase the availability of funds to banks – and establishing foreign exchange swap lines with the Bank of Canada, the Bank of England, the European Central Bank and the Swiss National Bank.

According to the FOMC's accompanying statement, ‘By allowing the Federal Reserve to inject term funds through a broader range of counterparties and against a broader range of collateral than open market operations, this facility could help promote the efficient dissemination of liquidity when the unsecured interbank markets are under stress.’

If Wall Street's quick rebound on Wednesday is any indication, the promise of liquidity help from abroad may have been the flicker of reassurance that nervous market participants sought – for one day, at least.

Jessica Lillian, Commercial Mortgage Insight


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