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Fed Reaffirms Plan to Stop Buying MBS
Yes, the Federal Reserve Board said today that it will leave “for an extended period of time” interest rates at 0% to 0.25%.
But that wasn’t the news of note, to my mind. Rather, the important development was that the Federal Reserve confirmed in its FOMC note today that it will stop buying mortgage-backed securities, effectively ending its support of that market. The Fed said:
To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve is in the process of purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt. In order to promote a smooth transition in markets, the Committee is gradually slowing the pace of these purchases, and it anticipates that these transactions will be executed by the end of the first quarter of 2010. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets.
I’ve already written here about the ramifications of the Fed’s recusal from the MBS market here. Today’s full-steam-ahead notice sounds like the Fed is using its abandonment of the MBS market as a bone to throw at the inflation hawks. Whatever the underlying dynamics, the Fed’s retreat for the secondary mortgage market should be the headline of the day — and one that comes with many question marks for the capital markets.
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