Ben Bernanke, chairman of the United States Federal Reserve has agreed to reinvest proceeds from the nearly $1.3 trillion in mortgage debt, acquired during 2008, in an effort to keep borrowing costs down. This seems to be a major policy shift for the central bank compared to policies past.
During one of the worst economic crises since the Great Depression, this measure is being put forth in hope to provide economic stimulus while minimizing interest rates and tax rates.
The biggest obstacles currently putting the economy in a depressed state are unemployment rates (still sitting around 9.5%) and the housing market.
Additional hopes are that with continued record low mortgage rates, real estate consumers will take advantage and capitalize on the high incentive to purchase homes.
Additional goals of the Fed’s latest measures are the reduction of government debt, the stabilization of short-term interest rates, and a decrease in the unemployment rate.
If all does not go according to plan the Federal Reserve does have other options to assist with the economic crisis.
“Should the outlook continue to worsen, the Fed will likely initiate a new round of asset purchases,” said Michael Gapen, economist at Barclays Capital.
Earlier in 2009, the Fed purchased the mortgage securities of Fannie Mae and Freddie Mac in addition to $300 billion in government debt. The continuous purchase of government debt may be a short-term solution, but the real question will be if tax rates skyrocket in the time to come.
