One of the big worries about a potential double-dip recession -- that after a brief period of recovery, the economy would once again start shrinking -- was that as the government, and in particular the Federal Reserve, pulled back its support of various markets, credit costs would climb, hitting people's pocketbooks at a particularly vulnerable time. However, Bloomberg reports that things seem to be going all right:
Fixed mortgage rates likely will rise less than a quarter of a percentage point in the next three months, the smallest increase for the second quarter since a drop in 2005, according to estimates by Fannie Mae and Freddie Mac. The gain would add about $30 to the monthly payment for a $250,000 mortgage.“What we are seeing is an effective handoff occurring between the Fed and industry buyers such as banks and pension funds,” said Christopher Sebald, chief investment officer for Advantus Capital Management in St. Paul, Minnesota, which oversees $18.5 billion, including about $5.6 billion in mortgage bonds. “I thought the Fed’s exit would leave a bigger void.”
That, and inflation is "subdued." Plus, the Fed has been making money off of its extraordinary support programs: "In 2009, income earned by the Reserve Banks totaled $52.1 billion, of which $46.1 billion were transferred to the Treasury." While I'm not normatively in favor of the Fed's huge interventions in the market and would like to see them wound down as quickly as is prudent, I do hate to see people complaining about how much they cost taxpayers, because it's hard to back that up.
With all this Fed talk, let me give wise readers something to look forward to: The next Physical Paper Anachronism edition of TAP has a comprehensive discussion on financial reform that we've gone to great lengths to put together, including my ideas on reforming the Federal Reserve to make it more transparent, effective, and responsive to its actual mandates and not political or financial interference. Basically, if you've read this far, you'll want to get the June issue.
-- Tim Fernholz
