15 Sep 09 Mortgage Backed Securities
The Fed’s next key decision is how to wind down its program to buy home mortgage securities and to assess its effect on mortgage rates as that occurs. The central bank now accounts for all but a sliver of the market for mortgage-backed securities, crowding out private activity and raising doubts about how the market would function without government involvement. At their August gathering, some Fed policy makers believed that a “tapering” of those purchases beyond their scheduled conclusion in December “could be helpful in the future as those programs approach completion,” according to minutes of the meeting. Two weeks later, Richmond Fed President Jeffrey Lacker said in a speech that he “will be evaluating carefully whether we need or want the additional stimulus” that purchasing the full announced amount would provide. But another policy maker, Chicago Fed President Charles Evans, said he expects the Fed to carry out the entire amount of purchases. Other Fed officials share that view, worrying about the Fed breaking from a commitment the market is counting on. The central bank’s program has pushed mortgage rates down substantially over the past year, helping to spur the housing market and support the overall economic recovery. How much mortgage loan yields rise when the central bank ends its purchases will depend in part on how the Fed communicates its plans and how private investors respond. Policy makers are considering two main views of how the central bank’s involvement influences mortgage rates: by its total stock of mortgage-backed securities, or by the flow of its purchases.
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