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Stein: Fed intervention aided housing

Aggressive Federal Reserve policies paid off, boosting segments of the economy now experiencing marked improvement – namely housing and auto lending, says Federal Reserve Governor Jeremy Stein.

While speaking at the C. Peter McColough Series on International Economics in New York, Stein tried to provide some clarity around the Federal Reserve’s hinting at a pullback in mortgage-bond purchases, despite Federal Reserve Chairman Ben Bernanke still managing to be vague enough to keep the markets guessing.

Stein walked the same fine line, suggesting Bernanke is on one hand hinting to an eventual MBS-purchase cutoff date, while remaining vague as to when that may occur.

Nine months after beginning aggressive asset purchases, Stein says he’s witnessing improvements in areas of the economy where the Fed directly influenced growth through the federal funds rate and mortgage-bond purchases.

“With respect to the economic fundamentals, both the current state of the labor market, as well as the outlook, have improved since September 2012,” he said. “Back then, the unemployment rate was 8.1% and nonfarm payrolls were reported to have increased at a monthly rate of 97,000 over the prior six months; today, those figures are 7.6 percent and 194,000, respectively.”

While Stein admits it’s impossible to determine the effect of the Fed’s purchases, he believes the brighter spots in today’s economy – housing and autos – are a direct result of monetary accommodation. The risk-to-reward ratio that generally comes with so much monetary intervention has passed ‘the cost-benefit test’ thus far, Stein added.

Yet, his speech shows how careful members of the Federal Reserve tread when trying to describe Bernanke’s various hints about the potential end of QE3 and the eventual raising of the federal funds rate, which has hovered near zero for several years now.

“In particular, I view Chairman Bernanke’s remarks at his press conference–in which he suggested that if the economy progresses generally as we anticipate then the asset purchase program might be expected to wrap up when unemployment falls to the 7 percent range–as an effort to put more specificity around the heretofore less well-defined notion of substantial progress,” said Stein. 

And while unemployment is a barometer for determining when the Fed will end its mortgage-backed securities purchases, it’s not the only factor. If inflation remains soft, Stein believes the Fed may have the room necessary to keep the funds rate at a lower level even beyond the 6.5% unemployment cut-off point if the market still needs it and inflationary pressures remain subdued.


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