Outlook: The Federal Reserve made no tweaks to monetary policy this week, but recent speeches by Federal Open Market Committee members suggest they are homing in on the US housing market as the one place they might still have leverage to boost the sluggish economic recovery.
Last month, the Fed restarted a programme of buying mortgage-backed bonds, in the hope of making mortgages easier to come by. The odds are that the Fed will accelerate this shift in its quantitative easing (QE) programme from buying Treasuries to buying mortgages.
Pushing down mortgage rates and easing the mortgage famine in this way will do more than just help to raise house prices, making consumers wealthier and more confident.
Revised monthly unemployment figures, out yesterday, showed that things were not as bad over the autumn as they had first seemed, but the private sector added a mere 104,000 jobs in October and the dismal road back to full employment still stretches into the horizon. The number of Americans who have been out of work for more than 6 months is close to six million.
Ben Bernanke, the Fed chairman, warned he has only a narrow window to act before this cyclical unemployment hardens into a structural problem – before all these laid-off workers give up job-hunting, lose their skills and become, in effect, unemployable. At that point, no amount of monetary policy innovation is going to get these people back to work.
The Fed is mandated to target full employment and it knows the moribund housing market is paralysing the labour market, too. The inability to move home is an impediment to the labour market flexibility that will be needed to crack structural unemployment. Despite the central bank's inaction this week, all roads lead to QE.