The Federal Reserve on Wednesday unveiled a plan it believes will help stimulate the economy and build up the crumbling housing market.
The Fed’s plan, nicknamed “Operation Twist,” is to switch from buying short-term securities in exchange for longer-term holdings, which could in turn reduce rates on mortgages and other consumer and business loans.
The Federal Reserve is going to sell $400 billion in Treasury securities that have remaining maturities of three years or less, and then use those funds to invest in long-term Treasuries with maturities of six to 30 years.
According to the Fed: “This program should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative.”
In other words, borrowing money could become more affordable.
“To help support conditions in mortgage markets, the Committee will now reinvest principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities,” explained the Fed.
Regardless of the plan’s long-term effect, there was an immediate reaction. Minutes after the Fed announced its new economic plan, mortgage rates began to drop and were lowered by banks and mortgage lenders throughout the day.
According to the Fed, those rates should remain low through at least June of 2013.
The problem is that interest rates have already been hovering at record lows — the 30-year fixed-rate mortgage averaged 4.09 this week and the 15-year FRM was at 3.29 — and that alone has failed to bring out the home buyers.
The Fed’s plan does not seem strong not enough to save the housing industry.
But it is a good start.