Is the Market Ready for Less Fed Help?

Since the housing market went belly-up and took Wall Street down with it, the Federal Reserve has been doing all it can to bail out the industry and provide liquidity in the system. The buying up of U.S. Treasuries and government-backed mortgage backed securities (MBS) has been the Fed’s focus.

But as the housing market has started to show signs of life again, the Fed has announced plans to slow down its purchases of Treasuries. It seems to be considering a similar plan with mortgage debt.

“I think something similar might be possible for MBS, but no decision has been made,” said St. Louis Federal Reserve Bank President James Bullard in Little Rock, Arkansas on Thursday. “I think we agreed that on the Treasuries we’d do the tapering thing and see how it works. We can decide some time during the fall how we want to do the MBS.”

And Richmond Fed President Jeffrey Lacker said Thursday in Danville, Virginia:

“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.”

Originally the Fed was prepared to buy up to $1.25 trillion of MBS, but has spent just over $792 billion so far of securities backed by Fannie Mae, Freddie Mac, and Ginnie Mae.

Some people are excited about the possibility of an early exit strategy for the Fed, saying it will open the door for private investors to take over again. Others are not sure the markets are ready for the pullout.
For example Larry Doyle, on the Wall Street Pit blog says:

While Fed governor Lacker would maintain that the Fed may slow its purchasing of MBS because the economy has improved and continues to improve, I would beg to differ. Home sales are rebounding, but delinquencies and foreclosures are running at record pace. Those statistics, in my opinion, continue to cast dark clouds on our housing landscape.

He also predicts that mortgage rates will move higher as a result, probably in the range of 0.50 percent to 0.75 percent, a move that could put a serious damper on the recent flow of home purchase activity.

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One Response to “Is the Market Ready for Less Fed Help?”

  1. Ellen responded on 02 Sep 2009 at 6:42 am #

    Well, you’ve got to take the training wheels off sometime, don’t you?

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