Opinion | Federal Reserve officials are worried they're fueling America's red hot housing market. But their prescription to slow down home prices will only hurt the US economy. By pearkes.
. In its most simple and commonly used form, QE is when the Fed purchases various types of federal government liabilities.
While the Fed has purchased other assets at various points since 2008,"garden variety" QE involves purchases of government-issued debt that doesn't have any risk of default. Since last year,$80 billion of Treasuries per month and $40 billion of MBS per month. Agency MBS carry virtually zero credit risk, like Treasuries. If a homeowner stops paying, either the GSEs or the government covers their shortfall. That makes them a convenient way for the Fed to reduce the amount of interest rate risk that the private sector holds. There are about $2 trillion of these bonds outstanding as of the first quarter, versus $21.3 trillion in marketable Treasury debt.
When the Fed buys agency MBS, it is reducing the aggregate interest rate risk the private sector must digest — in other words it is broadly making the lending environment more favorable forborrowers and boosting the economy. It isn't changing lending standards which dictate whether or not a mortgage can be used in an agency MBS sold to the GSEs, or reducing mortgage rates relative to other interest rates more generally..
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