Fed To Keep Buying MBS?
Since the beginning of the financial crisis, the Federal Reserve has been taking numerous actions to keep credit markets flowing. One such action included buying mortgage-backed securities (MBS). Recently, there's been some talk that this particular program could be one of the casualties as the Fed begins to rein in its spending as the economy improves. Today, an article from the Wall Street Journal casts some doubt on that theory.
That's a lot of MBS. The WSJ notes that several Fed policy makers have suggested that the mortgage-related spending spree may be halted before it's reached the targets of $1.25 billion for MBS and $200 billion in Fannie/Freddie debt. But the Journal believes these policy makers are a small minority. It says:
Top Fed officials believe such a move would tighten overall monetary policy at a time when they still worry about the durability of the economic recovery. The Fed has completed about two-thirds of its purchases, almost $1 trillion worth, and is likely to complete the rest unless prospects for the economy improve radically in the coming months.
I agree. In fact, I would not be surprised if these targets are raised. Of all the credit markets that the Fed has to worry about, the mortgage market will likely be one of the last to come back to life. So even if the broader economy gets back to business as usual, residential real estate might not.
If the Fed were to pull the plug on this program prematurely then that could spell doom for the housing market. That segment of business is vital to the U.S. economy's health. As Chariman Bernanke said today, the recovery itself is likely to be a slow one. So the assumption that the housing market might be in good enough shape anytime soon for the Fed to stop buying mortgage-related securities seems doubtful. Of all its programs to keep credit markets going, I would think this should be one of the last standing.