Fed bets big in new push to rescue U.S. economy - Yahoo! News: WASHINGTON (Reuters) - The Federal Reserve launched another aggressive stimulus program on Thursday, saying it would pump $40 billion into the U.S. economy each month until it saw a sustained upturn in the weak jobs market.
The central bank's decision to tie its controversial bond buying directly to economic conditions was an unprecedented step that marked a big escalation in its efforts to drive U.S. unemployment lower. Stock prices jumped, while gold hit a six-month high as investors braced for faster inflation.
Unlike in its two previous bond-buying sprees, the Fed said it would only purchase mortgage-backed securities, hoping in part to unstick a housing sector that Fed Chairman Ben Bernanke called "a missing piston" in the U.S. recovery.
As the perfessor has noted on this blog, housing is an important sector of the economy. According to the the National Association of Home Builders, housing and housing services account for 17 to 18 percent of GDP. Arguably a very significant part of the economy.
But I question whether goosing up this important sector can alone do the trick, especially when mortgage rates are already at 50 year lows. Homebuyers need stable jobs and incomes to meaningfully participate in the housing market and lenders won't lend unless they have them. That requires increased confidence in all parts of the economy, not just housing.