March 12, 2008 / 7:44 PM / 9 years ago

Economy.com says Fed action helps but not enough

2 Min Read

NEW YORK, March 12 (Reuters) - The U.S. Federal Reserve's action on Tuesday will help the market for agency mortgage-backed securities and loans, which is absolutely necessary to keep housing from unraveling further, a leading economist said in commentary published on Tuesday.

Mark Zandi, chief economist and co-founder of Moody's Economy.com, said the Federal Reserve's move to establish the Term Securities Lending Facility, or TSLF, will help stabilize the fragile market for Fannie Mae FNM.N and Freddie Mac FRE.N mortgage-backed securities.

The plan will provide up to $200 Treasury securities via weekly auctions to primary dealers in exchange for accepted collateral, including agency mortgage-backed securities.

The lending facility will also shore up the price of highly rated private mortgage-backed securities, he said.

Zandi said the Federal Reserve's action, however, does not directly address the vicious cycle in the housing market, in which rising foreclosures undermine house prices and homeowners' equity, resulting in more foreclosures.

"Until this cycle is broken, the financial system and broader economy will remain under severe pressure," he said.

The U.S. Federal Reserve's action on Tuesday is also not enough to solve the underlying problems in the financial system and broader economy, he said.

Zandi said the introduction of the lending facility probably indicates the Federal Open Market Committee, the Fed's policy-making arm, will cut the federal funds rate target by only 50 basis points on March 18 instead of the 75-basis point cut he expected prior to the the Fed's action this week.

The Bush administration and Congress should be planning for the possibility that the Federal Reserve won't be able to navigate the financial system and economy through the turmoil without assistance, Zandi said. (Reporting by Julie Haviv)

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