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Federal Reserve Board Discusses Mortgage Reduction-Faster Clip Buying

Washington — The Federal Reserve Board is discussing ways to ultimately curtail monetary easing policy, discussing whether to start by reducing mortgage-backed securities purchases to prevent adding fuel to the housing boom. doing.

The Fed has purchased $ 9.82 billion in mortgage bonds since March 5, 2020, and currently plans to continue to purchase at least $ 40 billion each month. These purchases, along with the Fed’s $ 80 billion monthly Treasury debt purchase, are aimed at curbing long-term borrowing costs to stimulate the economy to recover from the effects of the pandemic.

At its policy meeting June 15-16, the Federal Reserve Board reaffirmed its plans to keep short-term interest rates near zero and continue to buy assets for some time. They also started the discussion When and how to start reducing or tapering asset purchases as the first step in pulling the economy away from such support.

One option proposed at the meeting was to start shrinking mortgage purchases faster or faster than government bond purchases, officials said. It is called a 2-speed taper.

In an interview, Dallas Fed President Robert Kaplan mentioned mortgage purchases, which he believes contributed to rising home prices, “these purchases have unintended consequences and side effects.” Stated. He used to say he was wondering if he still needed a purchase. “We shared our views,” he said at a policy meeting.

In an interview with CNBC on June 18, James Bullard, President of the Federal Reserve Bank of St. Louis, said: I’m a little leaning towards ideas According to some, it may not be necessary to invest in mortgage-backed securities, where the housing market is booming and the housing bubble is threatened. “

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Federal Reserve Bank of Boston President Eric Rosengren

Proposed on May 5th Fed officials need to think about 2-speed taper. “The mortgage market probably doesn’t need as much support as it does now,” he said.

Other FRB officials disagree with this idea, saying that buying a combination of mortgages and Treasury securities will lower not only mortgage rates, but overall long-term rates. They say other factors are contributing to the hot housing market, such as a shortage of homes for sale compared to strong demand.

They see mortgage purchases in the same way as Treasury purchases. This is a way to push down long-term interest rates and push up prices across the economy by buying long-term securities. Bond prices and yields move in the opposite direction.

Mortgage purchases “do not directly affect the interest paid on mortgages,” said Mary Daily, Fed Governor of the San Francisco Fed.

I told reporters on Tuesday.. “My best estimate is that buying a mortgage-backed security will have a minimal impact on mortgage rates.” The 30-year fixed rate mortgage average interest rate According to Freddie Mac, it fell from about 3.5% in February 2020, before the pandemic hit the US economy, to 3.02% as of last week.

The US mortgage market involves several key players who play an important role in the process. Here’s what investors should understand and the risks they take when investing in the industry: The WSJ’s Telis Demos explains.Photo: Getty Images / Martin Barrow

Federal Reserve Board of Governors Lael Brainard

Said on June 1st The effects of monetary policy on the purchase of government bonds and mortgages are “almost the same.” She added: [current] The composition is effective, “she said.

The Fed’s Governor John Williams said last month that the purchase of mortgage bonds was “dollar-denominated and has a fairly strong spillover to other financial conditions such as corporate bond rates and other types of similar securities.” He reiterated last week that the Fed’s asset purchases “are not specifically targeted at the housing market.”

Kaplan and other supporters of the 2-speed taper — with former White House economic adviser Jason Furman Former Treasury Secretary

Lawrence Summers — Mortgage purchases are said to hold back low mortgage rates by historical standards. Lower rates allow home shoppers to raise their bids.In addition, the median home price in May rose 24% year-on-year and is already Rising at the fastest pace in decades..

“We all want rather low mortgage rates, but home prices are currently exploding,” Ferman told CNN on June 9. “The Fed shouldn’t keep lowering mortgage rates artificially.”

Federal Reserve Board Chair Jerome Powell has not publicly participated in the debate. But when Fed officials finally prepared to cut back on bond-buying programs, in 2013, Powell, then governor but not chairman, initially said, “Before starting to slow down. Mortgage-backed securities that supported the gradual decline in government bonds. That’s because it continued to support the housing market, which was still struggling after the 2007-2009 recession. “The reason is that this recovery is about housing,” he said at a policy meeting in October 2013, according to a written record.

Fed officials, including Powell, were also concerned that it would be difficult to articulate the more complex two-speed taper process, eventually resulting in the same purchase of both Treasury bonds and mortgage bonds. I decided to taper at a pace.

The purpose of the Fed’s asset purchases is to support the economy as a whole, not a specific sector. Delaying the purchase of a mortgage before the Treasury buys it would undermine its rationale by adjusting it to the situation in the housing sector. It also suggests that the Fed is using monetary policy to address concerns about the stability of the financial system that arise from rising house prices. Fed officials have long been reluctant to do so, said Roberto Perli, Global Policy Officer at Cornerstone Macro.

Tim Duy, chief US economist at SGH Macro Advisors, suspects the Fed may cool the housing market by reducing mortgage purchases.

“The only measurable impact on housing is to withdraw on demand. To do that, the Fed needs to raise long-term interest rates … but the Fed isn’t ready to do that.” Said Duy.

Write to Paul Kiernan at paul.kiernan@wsj.com

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Federal Reserve Board Discusses Mortgage Reduction-Faster Clip Buying

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