WASHINGTON. While Federal Reserve officials are debating how to ultimately cut back on their easy money policies, they debate whether to start by cutting back on purchases of mortgage-backed securities so as not to add fuel to the housing boom.
The Fed has repurchased $ 982 billion in mortgage bonds since March 5, 2020 and currently plans to buy at least $ 40 billion every month. These purchases, along with the Fed’s monthly purchases of $ 80 billion in Treasury debt, are aimed at containing long-term borrowing costs to stimulate the economy as it recovers from the effects of the pandemic.
Fed officials at a June 15-16 policy meeting confirmed plans to continue to keep short-term interest rates near zero and continue buying assets for some time. They also began to discuss when and how to start cutting back or cutting back on asset purchases as a first step towards weaning the economy away from such support.
One option proposed at the meeting was to start cutting back purchases of mortgage bonds earlier or faster than purchases of Treasury debt, officials said. Call this a two-speed taper.
“There are some unintended consequences and side effects of these purchases that we are seeing,” Dallas Federal Reserve President Robert Kaplan said in an interview, referring to the mortgage bond purchases he believes are contributing to the soaring house prices. Earlier, he said he doubted the need for a purchase. “I shared my views” at a political meeting, he said.
St. Louis Fed President James Bullard told CNBC on June 18: “I leaning a little towards the idea that some people think we may not need to use mortgage-backed securities in a booming housing market and even a threatening housing bubble. ”
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Boston Fed President Eric Rosengren
proposed on May 5 that Fed officials should think about the two-speed cone. “The mortgage market probably doesn’t need that kind of support right now,” he said.
Other Fed officials oppose the idea, saying that combined purchases of mortgage and Treasury securities generally lower long-term interest rates, not just mortgage rates. Other factors are contributing to the hot housing market, they say, including a shortage of homes for sale versus strong demand.
They view buying mortgage bonds in the same way as buying the Treasury – as a way to lower long-term rates across the economy by buying long-term securities, which drives up their prices. Bond prices and yields move in inverse proportion.
Buying mortgage bonds “doesn’t really directly affect the percentage you pay on your mortgage,” San Francisco Fed President Mary Daly said.
told reporters on Tuesday… “My guess is that buying mortgage-backed securities has minimal impact on mortgage interest rates.” IN average rate on a mortgage with a fixed rate for 30 years fell to 3.02% last week from about 3.5% in February 2020 before the pandemic hit the U.S. economy, according to Freddie Mac.
Fed Governor Lael Brainard
said June 1st that the effect of purchases of Treasury bonds and mortgage bonds on monetary policy is “about the same”. She added, “So in this sense [current] the composition is effective, ”she said.
New York Fed President John Williams said last month that buying mortgage bonds “dollar for dollar has some pretty strong spillover effects on other financial conditions, such as rates on corporate bonds and other similar securities.” He reiterated last week that the Fed’s asset purchases “are not targeted specifically at the housing market.”
Mr. Kaplan and other supporters of the two-speed taper, including former White House economic adviser Jason Fuhrman and former finance minister
Lawrence Summers – Says buying mortgage bonds is holding back already historically low mortgage rates. Lower rates allow home buyers to increase their rates. And median home prices, which rose 24% in May from a year earlier, are already growing at the fastest pace in decades…
“We would all prefer low mortgage rates. But housing prices are now skyrocketing, ”Furman said on June 9 on CNN. “This is probably not the case for the Fed to continue to artificially cut mortgage rates.”
Fed Chairman Jerome Powell has not spoken publicly about the debate. But the last time Fed officials were preparing to slash their bond buying program, in 2013, Mr. Powell – then a manager but not a chairman – first advocated cutting Treasury bonds “to zero” before starting to slow growth. mortgage-backed securities. This was because he was keen to continue to support the housing market, which was still struggling after the 2007-2009 recession. “The reason is that this recovery is very much about housing,” he said at a political meeting in October 2013, according to the transcript.
Fed officials, including Mr. Powell, ultimately decided to cut purchases of both Treasury and mortgage bonds at the same pace, in part because they worried that it would be difficult to clearly communicate the more complex, two-speed phase-out process.
The purpose of buying the Fed’s assets is to support the entire economy, not a single sector. Slowing down purchases of mortgage bonds ahead of Treasury purchases would undermine this rationale, adjusting it to the state of the housing sector. It also suggests that the Fed is using monetary policy to tackle the financial stability problem posed by higher house prices – something that Fed officials have long been reluctant to do, said Roberto Perli, head of global policy at Cornerstone Macro.
Tim Dye, chief economist at SGH Macro Advisors for the US, expressed doubt that the Fed would cool the housing market by buying fewer mortgage bonds.
“The only thing that will have a tangible impact on the housing stock is a reduction in demand, which requires the Fed to raise long-term rates … but the Fed is not ready for that,” said Mr Dai.
—Michael S. Derby contributed to this article.
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