Why Fed’s Latest “Twist” Won’t Help Housing

Last week the Federal Reserve announced a new plan to sell $400 billion in short term treasury notes to help raise the price of these securities and buy up an equivalent amount of Treasuries that mature in six to thirty years by June 2012 in an effort to drive long term credit even lower.

Bernanke also made it clear that with this move the Federal Reserve is completely out of bullets to fight an economy that even Bernanke admits stinks.

The Fed’s move, modeled on a 1960s monetary program called “Operation Twist,” merely rattled the stock market and drove down stocks by hundreds of points over the course of the week.  Public pessimism about the economy and a reaction to the tenuous state of Europe’s economy also contributed to the poor showing on Wall Street.

With mortgage interest rates already at historic lows there is little reason to believe that the Fed’s twist will bring homeowners back into the market.  The likely mortgage impact will be to reduce rates by another quarter percent, but little seems likely to drive consumers back into spending without a robust improvement in the job outlook.  Economists point out that consumers are in no hurry to buy because of the expectation that interest rates will remain low for a long time.

Jobs and consumer confidence come before a housing boom, not the other way around.