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The Fed’s Bond Buyup: Propping Up the People?

SS5-5-13Among his many wise words on living a prosperous and Godly life, King Solomon also spoke in his proverbs about obligations of monarchs and governors for the well being of their people. “Where there is no governor, the people shall fall,” he says in Proverbs 11:14. The intervention of government institutions in the welfare of the community isn’t new. But the Federal Reserve’s plan to buy up billions of dollars in mortgage-backed securities to stimulate the economic recovery takes the tradition to a new level. And now, as the recovery appears to be stalled, the Fed may be accelerating the buyup.

The change in plans comes in wake of fears that the struggling economic comeback may be weaker than predicted in some, but not all, key sectors. The housing market is showing signs of a more robust recovery, with a steady rise in home prices to levels not seen since 2006. But other areas of the economy are not so lucky. Industry and manufacturing continue to be weak. And although over 100,000 new jobs were created in April 2013, financial experts point out that that number falls well short of projected gains.

In the fall of 2012, the Federal Reserve announced plans to create a stimulus for the housing market as well as other areas of the economy by buying up over $8 million in mortgage backed securities every month for an indefinite period. That, officials reasoned, would help the housing market by keeping interest rates at their historic low levels and boost other areas of the economy as well.

In March 2013, economic indicators were bright enough that the Fed began to float plans to scale back on the buyup. But as these new numbers suggest that the recovery isn’t actually recovering all that well, it appears that these plans may have to change. Rather than scaling back the purchases, experts predict the Fed will have to continue buying securities at the same rate, if not higher, for at least the rest of 2013.

Some analysts expect that by the end of the year, the Fed will have bought over $1 trillion in Treasury and mortgage backed securities. That’s not the only way to stimulate the economy, of course – other options for the Fed include holding the bonds rather than selling them in order to tighten up monetary policy, or setting a lower unemployment threshold for raising interest rates.

As the value of the dollar retreats and the overall economic recovery lags behind expectations, the Fed’s intervention may help to keep interest rates low and boost incentives for expansion in key areas of manufacturing and industry. For investors following Jason Hartman’s recommendations for building wealth in income property, the Fed’s change of course means better mortgage rates and a heartier housing market – at least for today.  (Top image:Flickr/Moneylog)


The Solomon Success Team

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