Even though the Federal Reserve just started another round of economic stimulus, at least one Fed member does not think it is doing enough, mainly because of the housing market.
Federal Reserve Bank of New York President William Dudley said recently that “with the benefit of hindsight, monetary policy needed to be still more aggressive.”
In September, the Fed began its third stage of quantitative easing, or QE3, a policy of buying up $40 billion worth of mortgage-backed securities each month to pump more money into the economy and lower interest rates.
There is no arguing that the stimulus has been effective in lowering mortgage interest rates. Since the start of QE3, the average rate on a 30-year conventional fixed rate mortgage had fallen as low as 3.36 percent, a record-shattering all-time low.
And other housing reports have shown a slow general uptick of home prices and sales. So what is Dudley’s beef?
The recovery is not moving forward as fast as it could be, he says.
“One reason that monetary policy may have been less powerful than normal is that one of the primary channels through which monetary policy influences the real economy — housing finance — has been partially impaired,” Dudley said as quoted in a CNN Money article.
He cited tight lending standards across the mortgage industry as holding back growth. Dudley also pointed to Fannie Mae’s and Freddie Mac’s prohibitive fees that have made banks hesitant about making home loans.
“credit availability to households with lower-rated credit scores remains limited and households with homes that have fallen sharply in value have lost most or all of their home equity and this makes it very difficult for them to refinance these mortgages.”