Federal Reserve officials are starting to build a case for a new program of buying mortgage-backed securities to boost the ailing economy, though they appear unlikely to move swiftly.
The idea would be to target any new efforts by the central bank at the parts of the economy that are most severely impeding a recovery -- the housing and mortgage markets -- by working to push down mortgage rates.
Lower mortgage rates, in turn, could encourage more home buying and mortgage-refinancing, and help the economy by freeing up cash for consumers to spend on other goods and services. Mortgage rates are already very low, but some Fed officials believe they might be pushed lower. Moreover, Fed officials believe their past purchase programs helped to lift stock markets, by driving investors from low-risk investments toward riskier investments.
The Fed discussions occur amid broader efforts in the government to find ways to revive housing markets and stir refinancing.
"I believe we should move back up toward the top of the list of options the large-scale purchase of additional mortgage-backed securities," Federal Reserve governor Dan Tarullo said in a speech Thursday at Columbia University.
A new Fed mortgage-bond-buying program isn't a certainty. If inflation doesn't recede as many officials expect, or if the economy picks up with surprising vigor on its own, such a program might not win broad support inside the Fed.
The most recent economic data have looked a touch stronger. In a report Thursday, for instance, the Labor Department said the number of people filing claims for unemployment insurance edged down last week.
The Fed next meets on Nov. 1 and 2. Any step toward mortgage purchases would surely face fierce opposition internally from Fed officials who believe the central bank has done all it can to revive the economy and should avoid new measures.
Three officials -- Dallas Fed President Richard Fisher, Minneapolis Fed President Narayana Kocherlakota and Philadelphia Fed President Charles Plosser -- dissented from central bank decisions on the two most recent easing steps, in part because of worries the measures could ultimately create too much inflation.
The Fed also faces political opposition -- notably among Republicans -- to more securities purchases, known by many as "quantitative easing." Texas Gov. Rick Perry in August said more Fed money-pumping before the election would be "almost . . . treasonous."
But supporters of mortgage-bond purchases are emerging ahead of the November meeting to state their case.
In his speech Thursday, Mr. Tarullo argued that there was a need and "ample room" for additional measures by the Fed to spur more spending and investment, and that the risk of inflation is limited. And he said housing was where the Fed should direct its attention.
"Housing continues to hang like an albatross around the necks of homeowners and the economy as a whole, with millions of underwater mortgages, a staggering inventory of foreclosed homes, and depressed levels of sales," he said.
Mr. Tarullo's comments are notable in part because he doesn't typically venture into discussions of the economy. Mr. Tarullo is a lawyer and has focused mostly on bank regulation in his tenure as one of five governors on the Fed's Washington based board, which he joined in early 2009 after being appointed by President Barack Obama. He has worked closely with Fed Chairman Ben Bernanke bank regulatory issues, but this was his first major policy address on the economy and it put him firmly in a camp of activists at the central bank who want the Fed to do more to spur growth.
This group has become more vocal in recent months. Others have spoken out favorably about mortgage purchases recently. In an interview with The Wall Street Journal Wednesday, Boston Fed President Eric Rosengren said mortgage purchases should be on the table if the Fed needs to act again.
Mr. Bernanke hasn't spoken out recently on mortgage purchases. In testimony to Congress earlier this month, he pointed to the housing sector as a driver of past recoveries that is missing this time. In August, he called broadly for "good, proactive" housing policies from the government.
From 2009 through March 2010, the Fed purchased $1.25 trillion worth of mortgage-backed securities in a program that Mr. Bernanke believes played an important role in healing distressed financial markets during the crisis. The Fed halted the program as it appeared the recovery was gathering steam.
At their meeting in September, Fed officials announced a modest shift in favor of mortgages. Until that meeting, the Fed had been trying to steer its overall $2.6 trillion securities portfolio away from mortgage debt and toward Treasury debt.
Some Fed officials believe the central bank shouldn't be favoring one sector of the economy -- housing -- over others, and thus shouldn't be in mortgage securities at all. In September, the Fed said it would halt its gradual move away from mortgages and instead would keep its holdings of mortgage-backed securities steady. The Fed holds $867 billion of mortgage backed securities and an additional $108 billion of the debt of government-owned mortgage giants Fannie Mae and Freddie Mac, which it is reinvesting in mortgage backed securities when it matures.
There are some practical reasons why a step toward mortgage purchases, if it happens, might not happen right away. In a parallel track to discussions about securities purchases, Mr. Bernanke is pushing the central bank toward more clearly and explicitly communicating to the public how the Fed reacts to changes in inflation and unemployment. Officials might want to refrain from new bond-buying measures until that communication strategy is worked out.
Mortgage rates haven't fallen as much as yields on U.S. government debt this year. Yields on 10-year Treasury notes have fallen from 3.34% at the beginning of the year to 2.16%, a 1.18 percentage point decline. Mortgage rates haven't fallen as much. Rates on 30-year mortgages, for example, have fallen from 4.77% to 4.11%, a 0.66 percentage point decline, according to Freddie Mac.
No comments:
Post a Comment