MacroScope

Four reasons the Fed could buy mortgages

August 7, 2012
The U.S. Federal Reserve will probably focus on buying mortgage bonds if it decides to launch a third round of quantitative easing or QE3 at its September meeting, says Columbia Management’s senior interest rate strategist Zach Pandl, until recently an economist at Goldman Sachs.
1. Since the second phase of Operation Twist just got underway, “it would be strange to announce outright purchases of Treasury securities.”
2. Fed officials have publicly noted that continued purchases of long-term Treasury securities “might compromise the functioning of the Treasury market — and undermine the intended effects of the policy.”
3. San Francisco Fed President John Williams “directly advocated” mortgage purchases and Fed Vice Chair Janet Yellen has said that “beyond the Twist extension, ‘it’s more likely that [the FOMC] would do things that would take a different form.’”
4. “Purchases of mortgage-backed securities may be considered less controversial than Treasury bond purchases amidst the charged political environment, just prior to the presidential election.”

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