WASHINGTON - When Federal Reserve policy makers start to curb $85 billion in monthly bond buying, possibly before the end of the year, the last thing they want to do is spoil the nascent U.S. housing recovery.
That means the Fed may concentrate first on trimming purchases of Treasuries, while continuing to buy mortgage bonds to keep a lid on interest rates for home loans.
“There is a valid case to slow down Treasury purchases before MBS purchases,” said Roberto Perli, a partner at Cornerstone Macro LP in Washington and a former economist for the Fed’s division of monetary affairs. “The recent sharp increase in mortgage rates poses a threat to the housing recovery, and a continued housing recovery is necessary if the economy is to stay on a more robust trajectory.”
Policy makers led by Fed Chairman Ben S. Bernanke have said in the last two months that the central bank’s mortgage-backed securities program has helped the economy, with Boston Fed President Eric Rosengren urging reduction first in Treasury buying and San Francisco Fed’s John Williams saying mortgage buying was “more powerful.”
Minutes of the Federal Open Market Committee’s June 18-19 meeting, released yesterday, showed about half of the 19 participants wanted to halt bond purchases by year end. At the same time, the minutes showed many Fed officials wanted to see more signs employment is improving before backing a slowing in the pace of the purchases, known as quantitative easing. Bernanke said in a speech hours later that the U.S. economy needs “highly accommodative monetary policy for the foreseeable future.”
Stocks and bonds advanced around the world on Bernanke’s comments. The Standard & Poor’s 500 Index rose to above its previous record close, climbing 1.1 percent to 1,669.93 at 11:12 a.m. in New York.
The European Central Bank provided guidance similar to the Fed’s in a statement today saying its commitment to keep interest rates low for an extended period of time uses a “flexible horizon” and will depend on the euro area’s economic performance.
The latest reading on the U.S. labor market showed the number of Americans filing for unemployment benefits unexpectedly increased by 16,000 to a two-month high of 360,000 last week, during a period when applications fluctuate because of automobile plant shutdowns and the Independence Day holiday.
Consumer sentiment climbed for a fourth straight week, reaching the highest level in more than five years as Americans grew more upbeat about their finances, according to the Bloomberg Consumer Comfort Index.
Freddie Mac reported today that the average rate on a 30- year fixed-rate mortgage rose to a two-year high of 4.51 percent in the week ended July 11 from 3.31 percent in November.
Most economists surveyed by Bloomberg on June 19-20 said the initial tapering by the Fed will include a reduction in Treasury purchases as well as mortgage bonds, with 36 percent saying the larger cutback would be in Treasuries, 26 percent saying MBS and 38 percent predicting they would be pared equally.
The FOMC said at its most recent meeting it will continue buying $40 billion in mortgage bonds and $45 billion in Treasuries each month until the labor market “improves substantially.” The committee also pledged to keep the main interest rate near zero so long as the unemployment rate remains above 6.5 percent and the forecast for inflation doesn’t exceed 2.5 percent over one to two years.