Paul Kiernan at The Wall Street Journal reports that Fed officials are debating scaling back mortgage-bond purchases…
- No current changes. At their June meeting, The Fed reaffirmed plans to continue holding short-term interest rates near zero and continue the asset purchases for some time. However, they did begin discussing how and when they could reduce or taper asset purchases. “One option suggested at the meeting was to start scaling back the mortgage-bond purchases earlier or more quickly than the Treasury debt purchases”
- In support of this move. Dallas Fed President Robert Kaplan has said he thinks mortgage purchases are contributing to skyrocketing home prices. St. Louis Fed President James Bullard said in a CNBC interview “I’m leaning a little bit toward the idea that maybe we don’t need to be in mortgage-backed securities with a booming housing market and even a threatening housing bubble here, according to some people.”
- Not everyone agrees. San Francisco Fed President Mary Daly said in an interview that mortgage bond buys are “not really directly affecting the interest you pay on your mortgage.” Other officials argue that other factors are contributing to the hot housing market. Tim Duy, chief U.S. economist at SGH Macro Advisors, told WSJ, “The only thing that’s going to have a measurable impact on housing is pulling back on demand, for which you’d need the Fed to be raising longer-term rates…but the Fed’s not ready to do that,”
I believe both sides have point on this issue. MBS purchases are undoubtedly helping the housing market. However, as Tim Duy point out, the bigger factor fueling skyrocketing home prices is a lack of supply. If the Fed does pullback on MBS purchases I don’t think it will be the game changer some think it will be. The likely outcome is tougher lending standards and slightly higher rates.