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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.