Third time's the charm is what Fed is hoping

CNBC's Steve Liesman joins Andrea Mitchell Reports to recap the Fed meeting.

By John W. Schoen, NBC News

Acknowledging that the U.S. economy is not improving fast enough, the Federal Reserve Thursday opened the money spigots for the third time since the financial collapse of 2008.

This time around, the central bank targeted mortgage bonds in an effort to drive mortgage rates, already at historical lows, even lower. The open-ended promise to buy those bonds, at a pace of $40 billion a month, will drive the Fed?s holdings of securities past the $3 trillion mark.

The move, known as "quantitative easing," was widely expected. Fed Chairman Ben Bernanke signaled the plan to move ahead with what has been dubbed QE3 in a widely-watched speech last month, when he noted that U.S. unemployment remains stuck at stubbornly high levels.

Though financial markets responded enthusiastically to the Fed's announcement, some economists expressed doubts that this latest round of bond-buying will have any more impact than the prior two rounds.

?Try as it might, the Fed cannot prompt the economy to do much more under these circumstances,? said Bernard Baumohl, chief global economist at The?Economic Outlook?Group.

Nearly five years after one of the worst recessions in decades, the pace of economic growth and job creation is badly lagging prior recoveries. The U.S. economic woes are being compounded as Europe slides deeper into recession and the once-robust Chinese economy slows.

To add more weight to its latest policy move, the Fed promised to keep interest rates at "exceptionally low"?until at least mid-2015, rather than late 2014 as previously promised.

"If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional?asset?purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability," the Fed?said in a statement.

Buoyed by expectations that the easy-money policy was in the works, investors have bid up stock prices in the past few months in anticipation of the move. Major market indexes surged about 1 percent on the official announcement.

?Investors see QE3, they see successful can-kicking in Europe and are convinced that a lame duck Congress will save the day and extend the tax cuts that expire at year-end," said David Rosenberg, chief economist at Gluskin Sheff.

Central bankers are hoping that concentrating on lower mortgage rates will help accelerate a tepid recovery in the housing market, which historically helps lead the economy out of recession.

But potential home buyers face bigger hurdles than low rates, especially the nearly one in four owners who owe more on their mortgage than their home is worth.

?The problems of limited equity, tight lending standards and appraisal problems are still out there limiting the Fed?s effectiveness,? said Joel Naroff, chief economist at Naroff Economic Advisors. ?At least the Fed members can say they are trying. That is more than what we can say about Congress.?

Despite repeated calls by Bernanke for help from Capitol Hill, the Fed is powerless to head off the looming impact of the "fiscal cliff" if congress fails to act on its budget impasse.

Unless the current stalemate can be broken, ruinous tax increases and spending cuts are set to kick in by year-end. Economists, including researchers at the Congressional Budget Office, have warned the combined impact of the fiscal moves will almost certainly drive the U.S. economy into a nasty recession.

The Fed is hoping that cheaper money will encourage companies and households to borrow and spend more, boosting demand and prompting employers to create more jobs.

But worries that Congress may not avert the ?fiscal cliff? in time are weighing on consumer and business confidence, prompting them to cut back, according to Russell Goldsmith, CEO of City National Bank in Los Angeles.

?That's why our deposits are up enormously,? he said. ?People are saying, ?I?m sitting on the sidelines. I want to know what the tax rates are going to be.??

?There's a risk that these guys will not solve it, and then you drive this weak GDP growth right below zero. So people want to say, ?Hey, I'll wait and see. So it's self-fulfilling. That slows down the economy and that hurts hiring.?

Source: http://economywatch.nbcnews.com/_news/2012/09/13/13846702-fed-aims-at-housing-market-in-bid-to-revive-faltering-recovery?lite

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