The Federal Reserve could easily purchase mortgage-backed securities or other assets with the cash it gets when existing MBS holdings roll off the government's books, but late Friday questions about whether this would be an effective means of economic stimulus persisted.
"One of the easiest things to do is just to reinvest," said Andy Busch, global currency and public policy strategist at BMO Capital Markets, in response to a question from this publication during a media conference call on the outlook for fixed income markets.
On Friday analysts began to weigh the Fed's next move in the wake of a weak jobs report that pushed down the yield on the benchmark 10-year Treasury to a yearly low. (See related story.)
The Federal Open Market Committee meets next week and it's a slam dunk that short term rates will remain unchanged. Purchase money lending remains extremely weak but with rates on 30-year loans drifting down to 4% or even lower, mortgage bankers are hoping for a new wave of refinancings. (Refis account for about 80% of all new loan applications.)
In the conference call, Busch noted that the Treasury could continue to buy its own bonds in an effort to force down interest rates even further. "The problem is it really doing anything?" he asked. "The Fed is going to have to get a little more creative."
