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Fed Decision to Purchase Mortgage-Backed Securities Will Have Little Impact on Economy, Expert Says

Released: 13-Sep-2012 4:15 PM EDT
Source Newsroom: University of Arkansas, Fayetteville
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Yeager available to comment on Fed announcement

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FAYETTEVILLE, Ark. – Despite a favorable response on Wall Street, the Federal Reserve’s announcement Thursday that it will purchase an additional $40 billion in mortgage-backed securities per month will likely have only minimal impact on the slowly recovering economy, said Tim Yeager, finance professor at the University of Arkansas and former economist at the Federal Reserve Bank of St. Louis.

“There is low cost to the move, but the benefit is also low,” Yeager said. “Unfortunately, these actions are unlikely to spur much additional economic activity.”

The Fed announced that it would add $23 billion of mortgage bonds to its portfolio by the end of September. Beyond this month, the new campaign of asset purchases will target a rate of about $40 billion a month. The Fed said that its actions “should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.” The Fed also announced that it expects to hold short-term interest rates near zero until at least mid-2015.

Although the actions cannot hurt the economy, Yeager said there is very little the Fed can do at this point to generate significant economic growth.

“The Fed has already spent most of the ammunition in its arsenal,” he said. “It has done just about all it can do with the policy tools it has.”

Throughout the banking crisis and recession, Yeager has been interviewed extensively and used as a source by many publications, including Wall Street Journal, Los Angeles Times, Forbes and USAToday.

His research has focused on government-sponsored enterprises such as Fannie Mae and Freddie Mac. He has investigated the trend toward universal banking and conducted the first empirical study of the effect of the Gramm-Leach-Bliley Act, which removed barriers separating commercial banking from investment banking, merchant banking and insurance underwriting. He also authored a more recent study that found that overreaching households led to the housing foreclosure crises.

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