Here’s a discussion about the government’s plan in detail.
Expect that this Wednesday, the Federal Reserve will reiterate their plans of buying long term Treasury securities to help drive down mortgage rates. Policymakers are set to convene for two days to tackle existing and new programs that the agency will execute.
The government’s intervention in the Treasury markets guarantees artificial mortgage rate declines. But how is this so? Treasury bonds, 30-year denominated instruments, are risk-free since it is issued by the government to finance its debt. In other words, the government can guarantee its obligations through all possible monetary solutions that it can execute. Treasury bonds’ interest rates, along that of T-notes’ and T-bills’, are determined by the forces of supply and demand. More demand for these instruments can come from economic expansion when people have the finances to lend their money to the government. Interest rates then rise together with investor confidence in the market.
Those who participate in the market do not limit themselves to federal instruments alone. They are also exposed to other securities as well. Because of this, banks that offer mortgage-backed securities pattern their mortgage rates after the Treasury markets’ rates but at a higher percentage. This is done to provide profits for the bank but at the same time contain the effects of substitutes. So by influencing the market through increasing Treasury securities demand, banks would be forced to lower their rates too. Lower mortgage rates fuel the real estate industry through more homeownership opportunities or second mortgage applications.
Pumping more money in the economy is one of the Federal Reserve’s top priorities in a period marred by the effects of recession.