Skip to main content

Morici: The Fed Must Stop Quantitative Easing ASAP

Mar 25, 2015

A prominent economist is warning that the Federal Reserve can no longer justify its hemming and hawing over the inevitable increase in interest rates.

According to Dr. Peter Morici, a professor at the University of Maryland and a syndicated economics columnist, the Fed’s policies have created a lopsided environment that has created unequal parts of benefit and damage.

“For several years now, borrowers have enjoyed low rates across the whole range of maturities, and this has distorted asset markets and economic growth by encouraging excessive investment and borrowing in some activities at the expense of others,” Dr. Morici explained. “For example, banks specialize in borrowing short (issuing CDs) and lending long (financing corporate debt and mortgages), and currently the spread between the five-year CD rates and 15-year mortgages is about 1.65 percent. Bankers need wider spreads on loans—up to three percentage points—to cover risks and earn a return on capital. Narrow spreads encourage more reliance on bank fees and riskier activities like speculation in commodity and foreign exchange markets.”

On both Main Street and Wall Street, Dr. Morici added, the Fed’s policies have warped how business should be conducted.

“Cheap mortgages financed by Fannie Mae and other government lenders have fueled strong property appreciation in more fashionable neighborhoods of New York and other urban locales, even as half the homeowners in Atlanta and elsewhere remain underwater,” Dr. Morici continued. “Agricultural land values are similarly inflated. Cheap rates on high grade corporate bonds have inspired some firms to buy back stock with borrowed money, increasing their vulnerability during the next recession, and encouraged ordinary investors to purchase riskier junk bonds to obtain decent yields.”

Dr. Morici observed that drawing out Quantitative Easing is doing more harm than good for the mortgage market.

“The longer long rates are suppressed, the tougher it will be to get banks fully back into the mortgage lending business and lessen reliance on federally owned Fannie and Freddie,” Dr. Morici said. “And the greater will be the pain for property owners and savers who foolishly bought bonds issued by weak companies … As a legacy of Quantitative Easing, the Fed holds $2.3 trillion in Treasury and mortgage-backed securities with maturities of at least 10 years that it can gradually sell back to the public.  To push up long rates along with the Fed funds rate, it may have to take that unprecedented action.”

About the author
Mar 25, 2015
Condo Prices, Sales Falling In Florida

New regulations and rising insurance costs hold back buyers in six major metros.

Feb 26, 2024
Buyer Beware

Unpriced climate risk the housing market’s bubble in the bloodstream.

Feb 26, 2024
Rocket Companies Reports Decline in Fourth Quarter Revenue, Projects Optimism for Future Growth

Despite revenue dip, mortgage giant sees increase in market share and advances in AI technology.

Feb 22, 2024
Broker Action Coalition Unveils Inaugural Board Of Directors

Newly formed nonprofit organization BAC announces industry professionals to guide its mission of legislative change and educational initiatives in the mortgage industry.

Feb 21, 2024
GSEs Report Strong Earnings

Robust performance marks growth for both Fannie Mae and Freddie Mac, despite a dip in home purchases.

Feb 15, 2024
Friendly Competition Joins Forces

The merger aims to enhance local fulfillment and sales support, marking Guild’s sixth acquisition since 2021 and expanding its licensed originators to over 2,100 amidst a challenging market.

Feb 14, 2024