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New Fed Stimulus: Mortgage Bonds and Treasuries on the Shopping List

Driving home rationale for its decision to intervene with new initiatives to help the U.S. economy get back on track, the ""Federal Reserve"":http://www.federalreserve.gov on Wednesday reiterated the painful truth many Americans are living with every day.

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""[E]conomic growth remains slow…the unemployment rate remains elevated…and the housing sector remains depressed,"" the Fed ""said in a statement"":http://www.federalreserve.gov/newsevents/press/monetary/20110921a.htm released after wrapping up its two-day policy meeting.

With these, among other downside risks, holding back the economic recovery, the Federal Reserve says it will begin reinvesting its money into mortgage-backed securities issued by Fannie Mae and Freddie Mac, and it will purchase another $400 billion in Treasury bonds.

The Federal Reserve faced pressure from both sides of the argument on whether to act or not act.

Investors were looking for new policy measures to stimulate the stalled economy, while Republican members of Congress began lobbying just days before the Fed’s meeting for the U.S. central bank to abstain from taking

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additional actions and let the markets make a go of self-correction. Investors won this round.

The Fed enacted what’s been dubbed “Operation Twist.” To help support conditions in the mortgage market, the central bank will now reinvest principal payments from its holdings of GSE debt and mortgage-backed securities back into new mortgage bonds issued by Fannie Mae and Freddie Mac.

The central bank also decided to extend the average maturity of its holdings of Treasury bonds. It intends to purchase $400 billion of Treasury securities by the end of June 2012 with remaining maturities of 6 years to 30 years, and to sell an equal amount of Treasury securities with remaining maturities of 3 years or less.

The Fed says this program “should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative.”

This downward pressure is expected to extend to mortgage interest rates, but most industry experts say the Fed has missed the mark for any meaningful stimulation for the housing and mortgage markets.

With mortgage rates already at record lows, analysts, economists, and professionals in the mortgage and real estate industries agree the real problem lies in boosting consumer confidence and demand for property ownership.

Three committee members â€" Richard Fisher, Narayana Kocherlakota, and Charles Plosser â€" voted against the new monetary policy action on the grounds they do not believe additional policy accommodation is needed at this time.

The Fed also reiterated that it will continue to hold the target range for the federal funds rate at 0 to 0.25 percent, and will likely keep it there at least through mid-2013.

About Author: Carrie Bay

Carrie Bay is a freelance writer for DS News and its sister publication MReport. She served as online editor for DSNews.com from 2008 through 2011. Prior to joining DS News and the Five Star organization, she managed public relations, marketing, and media relations initiatives for several B2B companies in the financial services, technology, and telecommunications industries. She also wrote for retail and nonprofit organizations upon graduating from Texas A&M University with degrees in journalism and English.
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