To buy, or not to buy MBS
It looks like the lines are being drawn within the Fed regarding its massive $1.25 trillion MBS asset purchase plan that’s due to expire at the end of the year.
New York Fed President William Dudley told CNBC earlier Monday that it’s too early to think about pulling back on these programs, and points to market expectations as a big reason the Fed should proceed carefully. The market expects the Fed to buy the full amount and is currently trying to figure out whether there’s a possibility the Fed will extend the program into next year to make for a smoother transition.
These purchases, if completed, will account for roughly a quarter of the outstanding MBS market. Without the Fed’s support, risk premiums are expected to shoot higher (and with them mortgage rates) to lure back investors who have moved into other areas of the credit markets to find juicier yields.
Dudley’s remarks come after Richmond Fed President Jeffrey Lacker indicated that improving financial conditions mean the central bank may not need to purchase the full amount of MBS.
With the economy leveling out and beginning to grow again later this year, and with bank reserve demand ebbing as financial conditions improve, I will be evaluating carefully whether we need or want the additional stimulus that purchasing the full amount authorized under our agency mortgage-backed securities purchase program would provide.
Both Dudley and Lacker are voters on the policy-setting FOMC.
This is likely to get much more attention in the coming days and weeks as investors, pundits and bloggers weigh in on the one-year anniversary of the government’s seizure of Fannie and Freddie.
It’s also worth mentioning that it’s not just the Federal Reserve that has been gobbling up agency MBS. The U.S. Treasury has too. Since September 2008, Treasury had bought nearly $150 billion of MBS through May 2009, the latest figures I have at my finger tips. I’ll update with more current figures when I get them.
UPDATE: Treasury purchases through July 2009 are $171.8 billion, according to the FHFA.