Fed Will Continue To Buy $ 40 Billion Mortgage Loans Every Month

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On Wednesday, Fed officials said the economic course is still dependent on the course of the pandemic, so the Federal Reserve is in no hurry to begin cutting monthly purchases of $ 120 billion in mortgage-backed securities and government debt.

Many economists believe these purchases, including $ 80 billion in Treasuries and $ 40 billion in mortgage bonds, helped keep mortgage rates at record lows. But as the Fed’s quantitative easing balance sheet approaches $ 8 trillion and inflation begins to rise, some critics want the Fed to at least talk about when it could come down.

That did not happen on Wednesday, and neither a statement issued by the Federal Open Markets Committee nor comments from Fed Chairman Jerome Powell shed new light on the schedule for a cut in Fed debt purchases or an increase in the short-term federal funds rate from zero.

IN statementThe committee stated: “The development of the economy continues to depend on the spread of the virus. Vaccine progress is likely to continue to diminish the economic impact of the public health crisis, but risks to the economic outlook remain. ”

In December, the committee said it would continue to buy $ 120 billion in debt a month, “until significant further progress is made” in meeting employment and inflation targets. Although the long-term goal is to keep inflation below 2%, the Fed today reiterated that it is okay if inflation “moderately exceeds” this target for some time.

“Our asset purchases have been a critical tool,” Powell said at a press conference after Wednesday’s meeting. “They helped maintain financial stability and have since helped create the financial environment to support the economy. At our meeting, which ended today, the committee approved its recommendation for the purchase of assets in December last year. We also looked at some considerations as to how our asset purchases could be adjusted, including their pace and composition, should economic conditions warrant a change. ”

Asked if he was sending advance notice before the cut, Powell said that was not his intention.

“We will try to bring added clarity to our views, both in the post-meeting statement and in the minutes and public comments that people are making,” Powell said. “You know, our approach should be as transparent as possible. We have not yet made “significant further progress”, so we have not yet achieved that. We think we need to cover up to get there. That’s what I would say. “

Powell said that in order for the committee to conclude that he has made “significant further progress,” he would like to move closer to his maximum employment goal.

“Maximum employment, we cannot reach a single target,” said the Fed chairman. “We monitor a wide range of data, various aspects of the labor market. There is unemployment among different age groups and the like. There is participation, there is wages, there is all kinds of data on flows. We’re looking at all of this to try to get an idea of ​​what maximum employment is. “

“I would like to see a lot of vacancies,” Powell replied to a clarifying question. “It’s kind of an idea.”

Powell admitted that inflation is above the Fed’s 2 percent target, “and it has been that way for months. He is expected to definitely exceed our goal for several months before we believe he will return to our goal. The question of whether we have achieved this goal remains with the committee. I cannot do this alone. “

Ordinarily, the Fed’s main instrument of monetary policy is the adjustment of the short-term federal funds rate – the rate that banks charge each other for overnight loans. When the economy overheats and inflation exceeds the Fed’s target, it can raise the federal funds rate, making borrowing more expensive. When the economy is at a standstill, the Fed can cut short-term rates to stimulate borrowing and growth.

Federal funds rate

Gray bars indicate a decline. Source: Board of Governors of the Federal Reserve System. Federal Reserve Bank of St. Louis

But once the Fed cut the federal funds rate to zero – as it did during the mortgage collapse in 2008 and the start of the pandemic in March 2020 – it will have other tools to turn to when needed.

By buying Treasury bonds and mortgage-backed securities, the Fed can keep long-term interest rates low. This quantitative easing is expected to be temporary. When the pandemic broke out, the Fed had just started to master more than $ 4 trillion in assets left over from the Great Recession of 2007-2009.

Fed Quantitative Easing Approaches $ 8 Trillion

Assets held by the Federal Reserve through quantitative easing are currently $ 7.66 trillion, including $ 5.24 trillion in long-term Treasury bonds and $ 2.42 trillion in mortgage-backed securities. Source: Board of Governors of the Federal Reserve System. Federal Reserve Bank of St. Louis

On March 15, 2020, the Federal Open Markets Committee pledged to buy at least $ 500 billion in Treasury bonds and $ 200 billion in mortgage-backed securities. Since then, Fed Treasury stocks have risen by nearly $ 3 trillion, and MBS assets have increased by more than $ 1 trillion.

This is worrying some economists, including Mohamed El-Erian, chief economic advisor to Allianz, the parent company of bond giant PIMCO.

“You can argue quite easily that the economic benefits are limited and far exceeded because of the costs and risks that begin to undermine the prospects for high, sustainable and inclusive growth,” El-Erian said. said Politico this week ahead of the Fed meeting.

During the pandemic, mortgage rates were at or near historic lows. Rates on 15-year fixed-rate mortgages have reached new low for the week ending July 22and 30-year fixed-rate mortgages just above their all-time lows of 2.65 percent in January.

But some critics say the Fed overestimates the impact of its purchases on rates, while others worry that low mortgage rates are pushing rates down. runaway housing price increasesas low rates give consumers more options to buy a home.

But cuts can be “a pretty tricky thing, there are many moving parts,” including how to quickly cut back purchases and whether to focus on mortgages or Treasuries, St. Louis Fed President James Bullard told CNBC last month

When asked if he would cut back on purchases of mortgages or Treasuries in the first place, Bullard said he “leans a little towards the idea that maybe we don’t need to use mortgage-backed securities in a booming housing market and even imminent housing bubble. here, according to some people. “

In a note to customers, Pantheon MacroecomicsIan Shepherdson said the rate of growth in labor costs “remains the single most important determinant of future US inflation.”

The Fed, Shepherdson said, “cannot stand aside and ignore the sustained rise in wage inflation unless policymakers are confident that it will be offset by faster productivity growth. But none of this will be clear until late autumn, and perhaps not until early 2022. The rate cuts will start sooner, but the Fed will want to be more cautious than some of the more belligerent and talkative regional presidents. ”

Email Matt Carter



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