Comments from Federal Reserve
Chairman Ben Bernanke last week indicate the central bank has given its stamp of approval to a streamlined refinancing program for American homeowners, according to one investment bank.
Analysts at Keefe, Bruyette & Woods
said Bernanke's comments, in conjunction with an article in The Wall Street Journal saying White House and Fed economists believe such a program could boost the economy, show the Fed will likely adjust monetary policy to support a new refinancing program should the Obama administration decide to implement one.
The WSJ report cited comments by Bernanke in his Jackson Hole,Wyo., speech
Friday that the weak housing market remains a significant drag on the U.S. economy. In the medium term, population growth and new household formation will force the housing market to stabilize and grow again, said Bernanke.
"Good, proactive housing policies could help speed that process," he said.
"If a streamlined refi program were announced by President Obama in his economic speech after Labor Day, we would expect the Fed to follow up with support after their meeting on September 20 and 21,” KBW analyst Mark Pawlak said. "This could be through a promise to maintain their portfolio at its current composition — i.e., reinvested proceeds would now go into (mortgage-backed securities) rather than Treasuries — or by a promise to maintain their portfolio at its current size for a given time period."
Such a move could set the stage for a third round of quantitative easing, the practice of the central bank adding to the money supply through the purchase of financial assets directly from private-sector businesses such as banks, according to the KBW report.
"Our expectation is that this news should give a short-term boost to most asset prices and hurt the dollar," Pawlak said. "In the long term, we are contemplating QE3 because the first two QE programs were not that effective in bumping the economy up from its slow growth path."
"We do not think that a third program, which should be incrementally weaker, will be any more effective," he said.
Write to Liz Enochs