In good company: Bernanke backs Tarullo on housing-targeted QE3

November 3, 2011

The Federal Reserve, which on Wednesday sharply downgraded its outlook for U.S. economic growth and employment, appears to be seriously considering another round of monetary easing. In what would represent a policy U-turn, any third round of quantitative easing or QE3 appears increasingly likely to be heavily tilted toward purchases of mortgage-backed securities.

The idea was recently floated rather surprisingly by Fed Governor Daniel Tarullo, who normally focuses on regulatory issues. Some analysts had speculated Tarullo might not have broad support, but Fed Chairman Ben Bernanke’s comments on the matter during his post-meeting press conference on Wednesday suggested otherwise:

The housing sector is a very important sector. Problems in that sector are a big reason why our economy’s not recovering more quickly. I do think that purchases of mortgage-backed securities is a viable option. Certainly, something we would consider if the condition were appropriate. So the answer is yes, we will certainly look into that.

Whether any such program would have the intended effect remains to be seen. The Fed already bought some $1.25 trillion of MBS as part of its first round of quantitative easing, to only modest effect. The central bank seems to be hoping that if its actions coincide with the government’s push for broader foreclosure relief, they may raise the chances of success. The U.S. housing slump has been ongoing now for over five years, with home values having fallen by about a third nationwide.

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