Fed Moves Hit Mortgage Rates, Oil Prices

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Moves made by the Federal Reserve Wednesday effectively pump more than $1 trillion into the credit markets. The initial impact seems to be on mortgage rates and oil prices.


From the studios of NPR West, this is Day to Day. I'm Alex Cohen.


I'm Madeleine Brand. Coming up, what if the government provided jobs for everyone who wanted to work? It's something lawmakers have seriously considered before. That story coming up.

COHEN: First though, the Federal Reserve's surprise decision yesterday to pour more than a trillion dollars into the credit markets may already be having an impact on America's pocketbooks. Mortgage rates have taken a big plunge, and oil prices are up. Here to explain is NPR's Jim Zarroli and Jim, can you recap for us what the Federal Reserve did and why?

JIM ZARROLI: Yeah, the Wall Street Journal headline this morning said the Fed is on a bond-buying binge. Basically, the Fed did two things, one of them unprecedented and one not unprecedented. The first is, it said it would buy $300 billion in long-term U.S. Treasury securities, which is something that the Fed has talked about but never done. Then it said it would buy another $750 billion - these are big numbers - in mortgage securities that are issued by Fannie Mae and Freddie Mac. And the point in both cases is just to flood the market with money, get the idea out there to investors that they can buy these securities so they'll feel safer about putting money into the markets. What the Fed is actually doing is creating money and sending it out into the financial system.

COHEN: And Jim, as we mentioned, this has already had some effect on mortgage rates and oil prices. What's been going on there?

ZARROLI: Well, almost right away you saw a big a drop in Treasury interest rates today. There's also a big drop in mortgage rates. They've already been falling over the past few months. They took another big drop yesterday, very quickly, right after the Fed announcement. So, you know, if you're looking to refinance, that's a really good thing. If you qualify for a mortgage, which has become a lot more difficult, that's a good thing. Thirty-year mortgage rates have fallen, I think, about four-tenths of a percentage point and you know, that matters because again, the housing market is the beginning of this crisis. Housing prices have come down a lot. That's had a ripple effect throughout the economy. It's hurt the banks. So we can increase mortgage activity. It can, you know, it can be an important step in reviving the economy.

COHEN: We've also seen a big drop in the dollar today. How is that related to the Fed's actions yesterday?

ZARROLI: Yeah, it's all interrelated, it kind of works like this. You know, the Fed buys up Treasury securities or says it's going to. It means there's more money out there to buy these securities, so more demand for them, so interest rates come down. And when Treasury interest rates come down, you know, people overseas have less incentive to buy them. So, the value of the dollar falls and then, you know, when the value of the dollar falls, it means commodity prices go up. So, we're seeing oil up this morning. So, all of these things are related to each other.

COHEN: And finally, Jim, a new name here. If you could debrief us as to what this one means. The term asset-backed lending facilities, something the Fed said it launched yesterday. What is that?

ZARROLI: You know, it's basically another tool for pouring money into the credit market. It's a way of supporting securities that go for consumer borrowing - auto loans, student loans - these have been, again, parts of the credit markets that have slowed quite a bit. You know, and the Fed really right now doesn't have any choice but to try to do whatever it can until the slide in economic activity stops. Interest rates have come down about as low as they can go. The Fed has to try new things, it has to be experimental. It has to test the tools that it's talked about before but it's never really had to use, and it has to keep trying this until the economy show signs of life again.

COHEN: NPR's Jim Zarroli. Thank you.

ZARROLI: You're welcome.

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