Federal Reserve banks on housing

The Wall Street euphoria that greeted Thursday's news from the Federal Reserve will help the economy only if it's shared by consumers.

And that depends to a large extent on the housing market, a key target of the Fed's latest action, said Tom Welle, president of First National Bank in Bemidji, where the housing bust erased hundreds of jobs in the wood products industry and shut down homebuilders.

"It's a huge segment that was pulled out from the economy when everything went so stagnant," Welle said. "That comes from that lack of consumer confidence."

Fed Chairman Ben Bernanke said Thursday that the central bank will do a third round of quantitative easing to combat stubbornly high unemployment. The bond-buying is designed to drive down interest rates further, encourage more lending and create jobs. It's not a new concept, though the Fed's open-ended commitment is.

Inasmuch as the move helps the housing market recover, this third round of quantitative easing will be helpful, said Jack Ablin, chief investment officer at BMO Harris in Chicago. The first two rounds helped the housing market stabilize, and a third round could give it more momentum.

He likes to point this out: In 2008, the 30-year mortgage rate was 5.6 percent, and now it's around 3.5 percent.

"That, for a given payment, now allows buyers to take on 25 percent more buying power," Ablin said. "It's gone a long way to help housing, but in terms of other lending, it's hard to know."

The Fed is also trying to get businesses to borrow more money and grow, a task that's been confounding.

Traci Tapani, co-owner of Wyoming Machine in Stacy, said a drop in interest rates is not going to get most businesses to expand or add a line of business.

"A small change in the interest rate is not going to change the decision about how you operate your business," she said.

Her company makes components for larger companies like MTS Systems and Caterpillar, and has been in business since 1974. Tapani, a former banker, took the business over with her sister in 1994. The company employs 55 people.

She said borrowing for capital expenditures has been attractive for a few years now and a lower rate doesn't alter that. Getting and maintaining an operating line of credit from a bank can be more difficult.

Macro vs. micro

Dale Andersen, owner of Delkor Systems in Circle Pines, builds and sells large-scale packaging equipment for food and beverage companies. He holds two views of the world in tension in his mind: there's the macro view, in which low interest rates are good for business; and the micro view, governed by relationships and individual business decisions.

It's difficult to pinpoint an order that came because of lower rates, he said, but especially on large capital projects like the ones he does, a slight difference in the interest rate can make a big difference in return on investment.

"I've never sold a machine because somebody called me up and said, 'Hey, interest rates were just lowered, I want to buy a machine,'" he said. "But if it's good for the economy, then I'll accept that as being good for my business, too."

Ablin said it's not likely businesses will start magically borrowing, expanding and creating jobs because of the Fed's action, but lower mortgage rates and movement in the housing market could be the first steps. Even a stock market spike after Bernanke's announcement is good for the consumer.

"His intention is to get asset values up and just raise household consumer confidence," Ablin said. "Once we see that, then corporate America can follow through."

Adam Belz • 612-673-4405