Interest Rate and Mortgage Market

¶ … Defense of the Fed's New Interest-Rate Policy, which was published by The Wall Street Journal on January 6th, 2013, financial reporters Frederic S. Mishkin and Michael Woodford carefully craft a justification of the Federal Reserve's latest revision to its federal-funds rate target. The purpose of the article is to inform readers about the Fed's recent Federal Open Market Committee (FOMC), which resulted in the decision to keep the federal-funds rate near zero with a contingency based on the national unemployment and inflation rates. By linking the federal-funds rate target to a baseline of 6.5% unemployment, and a predicted rate of 2.5% inflation, while also providing public notice regarding its previously private policy criteria, the Fed is renewing its efforts to stabilize an economy battered by a prolonged recession. As Mishkin and Woodford state in the article, this "commitment not to raise rates in the future as soon as might have been expected is an obvious way the FOMC can loosen current financial conditions" (2013), because when borrowers are secure in the knowledge that their interest rates will remain steady the flow of investment capital improves dramatically.

While the authors remain supportive of the Fed's latest policy revision, they also express a series of reservations regarding the overall strategic objectives associated with this shift, stating unequivocally that "the Fed's new approach has invited confusion about its longer-run policy targets" (Mishkin & Woodford, 2013). Their main point of contention appears to be the fact that on January 25th, 2012 the Fed explicitly stated its intention to avoid specifying a numerical target for maximum levels of sustainable unemployment, as this sector of the national economy remains outside of the Fed's recognized jurisdiction. As the authors of this article view the issue, the Fed's recent announcement that the federal-funds rate target will be tied directly to specific unemployment and inflation rates was not made with the proper level of clarification, allowing public opinion to shift to the point that "many have read the FOMC statement as an important departure from the policy framework codified as recently as January 2012" (Mishkin & Woodford, 2013). Because the authors of the article agree with the fundamental principles underlying the decision to make federal-funds rate criteria a matter of public record, the remainder of the article is dedicated to offering direct advice aimed at improving the Fed's messaging and public relations. Mishkin and Woodford remind readers in the distinctively droll tone made famous by The Wall Street Journal, "the central bank needs to reiterate that it does not have a 'target' unemployment rate and is not determined to achieve a specific unemployment rate regardless of the amount of monetary stimulus required to reach it (because) that type of overreaching ended badly in the 1970s, with rising inflation and unemployment" (2013).

After a close reading of the article summarized above, an informed reader is left to ponder a series of intriguing questions: What are the external economic factors which motivated the Fed to make such a sudden shift in its public monetary policy? How were the rates of 6.5% unemployment and 2.5% expected inflation calculated, and why should the federal-funds rate target be tied to these apparently arbitrary figures? These questions are important to consider because the near-zero funds rate currently in place is critically important to the economic resurgence taking place, and unless the motivations for maintaining this federal-funds interest rate are made eminently clear consumers, investors, and banks will lack the financial foresight to make the most profitable and productive choices.

Financial reporter Al Yoon authored an article entitled Private Mortgage Market Gains Momentum After Crisis, which was published by The Wall Street Journal on January 28th, 2013 in response to a resurgence in the previously vilified mortgage securitization industry. The purpose of the article is to inform readers about the ongoing rebound within the controversial realm of mortgage-back securities, which are dubious investment devices created to exploit the housing boom of the past decade, and are widely believed to be among the root causes of the so-called Great Recession. According to Yoon, "projections of issuance of as much as $25 billion this year are paltry compared with a peak above $1 trillion in 2006 & #8230; but the projected issuance is up from $4 billion last year, and has some momentum as the value of the U.S. housing stock stabilizes and regulatory hurdles are now known" (2013). After the mortgage market meltdown that marked the last decade, a series of tightened regulations were formulated and developed into binding legislation, but the investment banking industry remained hesitant to devote additional resources until its new boundaries were clearly understood. In his article, Yoon surmises that "another important step is the finalizing of regulations, including the definition of a 'qualified mortgage' that gives lenders guidance on what constitutes a borrower's ability to repay, over the next year and their going into effect" (2013), and it is this sense of clarity which is fueling the renaissance within the previously devastated mortgage-backed securities market. Yoon provides a series of quotes gathered from experts in the field of mortgage securitization, including U.S. Comptroller of the Currency Thomas Curry, Tom Deutsch, executive director of the American Securitization Forum, and Peter Sack, a managing director of securitized products at Credit Suisse. This rhetorical strategy proves to be quite effective, as Yoon deftly integrates opinions given by authorities on an admittedly esoteric economic topic to confirm his original premise that the mortgage-backed securities market is finally experience its long-awaited revival.

One interesting aspect of Yoon's authorial approach to this highly sensitive and controversial subject is his commitment to objectivity, as the nearly crippling damage inflicted by investment banks bundling mortgage-backed securities is mentioned only in the most detached terms. For instance, while he does open with the cogent observation that mortgage-backed securities "were among the leading causes of the financial crisis" and "aren't loved" (2013), Yoon spends the vast majority of the article emphasizing a potential link between the return to widespread mortgage securitization and the desperately needed economic turnaround America is still awaiting. By directly quoting Comptroller Curry's publically held view that "getting the securitization pipeline flowing again is a critical component in turning this picture around" (Yoon, 2013), the author leaves casual readers with the impression that mortgage-backed securities are a panacea in terms of reversing the very recession that they originally ignited. The article's overall premise would have been strengthened considerably had Yoon elected to include a supplementary quote from an expert well versed in the harmful consequences of unrestrained purchase and sale of mortgage-backed securities.