Saying he is “very supportive” of Operation Twist last week, Federal Reserve Bank of Boston president Eric Rosengren noted that the move took 18 basis points off 30-year Treasury yields and 22 basis points from 30-year mortgage rates the first day it was announced, and more since.
“Since some of this action had been anticipated and already reflected in market prices, I view this as a very significant decline,” Rosengren said in a speech in Stockholm, according to a prepared text released by the Fed.
“While there are a variety of impacts that lower long-term Treasury and mortgage yields can have, certainly one is encouraging more refinancing and home purchases than would happen in the absence of action. In my own view, the Federal Reserve should continue to closely monitor spreads between mortgage and Treasury yields and consider taking action if that spread widens significantly, as it had recently,” he said.
“While the housing sector and the economy would have been weaker in the absence of the Fed’s actions to lower rates, I believe it is equally important to examine housing policies that might be changed to reduce the impediments to monetary policy and more generally help facilitate recovery,” he added.
Rosengren also suggested Fannie Mae and Freddie Mac should play a major role “in achieving the public policy goals inherent in addressing these housing market problems.”
Weighing the costs and benefits of additional action “involves a high degree of uncertainty, given we have not operated at the zero bound with falling housing prices in the post-war period,” he said. “However, with unemployment at 9.1% and with inflation in the medium term expected to remain below 2%, monetary and fiscal policies should be focused on returning the economy to full employment.”