Bankers question Fed's $600B plan

Area bankers are uncertain but hopeful about the Federal Reserve’s plan to buy $600 billion in long-term Treasury securities during the next eight months and reinvest an additional $250 billion to $300 billion in securities with proceeds of earlier investments.

The strategy, known as quantitative easement, was announced Nov. 3 by the Federal Reserve Board of Governors in an effort to lower mortgage rates and stimulate the sluggish economy.

Banks and other financial institutions typically purchase the securities. The theory is that the Fed’s move would create extra capital for banks to invest into the economy. The question by area bankers is whether banks will respond with more generous lending or hold the capital to shore up their own rocky balance sheets.

Bankers respond
“Quantitative easement is the technical term – quantity being that it’s a specific amount of money, easement that it’s supposed to relieve some pressure on the banking industry by providing liquidity, more money for banks to loan, hopefully,” said Bob Hammerschmidt, Commerce Bank Springfield region president.

Local bankers see the plan as one that could help if the money is used as intended.

“I think anytime that you’re trying to stimulate housing and save people money, it’s a good idea,” said Aaron Jernigan, OakStar Bank’s mortgage division president. “There was an initial negative reaction after they announced it.”

“Because there were some negative comments about inflation, things of that nature, that sent the bond market the other way, we lost a little more than 200 basis points over four or five days.”

Jernigan said the goal of the plan is to keep rates low to increase affordability.

“Mortgage rates are still good,” Jernigan said, noting a 4.25 percent rate on a 30-year mortgage and 3.75 percent rate on a 15-year term.

He said mortgage rates have risen about a quarter percent since the Fed’s announcement.
Hammerschmidt expressed concern about what he called too many problem loans still on banks’ books.

“My fear is that this money doesn’t make it to the economy, and that it’s just used to shore up capital and reserves,” he said. “That’s one of the big risks in this move. We’re in uncharted territory.”

Jernigan speculated that if $600 billion is available for spending on this program, money for a jobs program might be in order.

“It all hinges around employment,” Jernigan said. “They have to figure out a way to put money into things that’ll generate jobs. It’s very simple – you can drive rates as low as you want. If rates are zero, that’s still too high if someone doesn’t have a job and can’t pay.”

Missouri’s unemployment rate edged up to 9.4 percent in October, from 9.3 percent in September, according to U.S. Bureau of Labor Statistics. The national unemployment rate in October held steady at 9.6 percent, where it’s been since May.

The aim of the massive cash injection is to help spur employment numbers and achieve price stability, though Ann Marie Baker, UMB Bank southwest Missouri president, said there are too many unknown variables.

“It’s difficult to say if that will be the actual outcome or not,” she said. “There already seems to be a good deal of liquidity in the system.”

“The Fed is trying to drive rates down on the longer part of the rate curve, obviously trying to spur economic growth, but time will tell whether that has the desired effect.”

Baker said uncertainty about issues such as taxes and health care is a bigger concern.

“Many of our commercial clients are sitting on cash balances and not choosing to invest that cash because of the general sense of uncertainty,” Baker said. “There’s a lot of cash waiting.
We’re seeing a lot of clients not using their borrowing capabilities.

“A pretty general consensus is that uncertainty rules today.”[[In-content Ad]]