The interview above was done as part of the pre-game show for the FOMC meeting. To view the interview click on picture above. To see any of our interviews click here.
In the interview we were asked what the Federal Reserve could do to satisfy the hawks. We said they could toughen up the language on the end of the mortgage purchase program.
Steve Liesman misunderstood us, believing we were trying to say the program might not end on April 1. This is not in doubt. What is in doubt is whether the Federal Reserve will be forced to restart the repurchase program after April 1.
In our discussions with mortgage traders many of them believe the Federal Reserve is only “pausing” and not “ending” the program on April 1. They believe that when (not if) the mortgage market runs into trouble, the Federal Reserve will be forced to restart their money printing to support mortgages. And when they do, the size of the purchases will be infinite for as long as is needed, despite what they Federal Reserve may say. You cannot keep increasing the size and scope of these programs without everyone realizing they are never going away.
A main reason many mortgage traders thought the mortgage program was only pausing and not ending was this phrase from the last several FOMC statements, including the January 27 FOMC statement:
The Committee will continue to evaluate its purchases of securities in light of the evolving economic outlook and conditions in financial markets.
Yesterday, in the March 16 FOMC statement, the Federal Reserve did alter this language:
The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability. [our emphasis]
Mortgage traders believe this to be more “dovish” language and further underscores their belief that the Federal Reserve is worried about ending the mortgage purchase program. The Federal Reserve will not have printed its last dollars to buy mortgages in two weeks.
Many economists believe the end of this program will be a non-event because everyone knows the Federal Reserve will no longer be in the mortgage market on April 1. This makes sense unless a fair number believe it is only pausing and not ending. In this case the market might not have discounted the end of the program and mortgages could hit turbulence once these purchases stop.
The Federal Reserve is in a tough spot because they can never say never regarding restarting mortgage purchases.
- The Wall Street Journal – Fed to End Mortgage-Purchase Program
The Federal Reserve said it will end, as planned, one of its main supports for the U.S. economy—purchases of $1.25 trillion of mortgage-backed securities—allowing a nascent economic recovery to stand with less government support…The Fed will complete the mortgage-backed securities purchases by the end of March, winding down a program that it and many economists believe played an important role in preventing a much deeper recession. The purchases helped drive up the value of these securities and thus drove down mortgage interest rates and helped financial markets…Some analysts have worried that the end to the Fed’s mortgage buying could raise mortgage rates. So far that hasn’t happened. Rates on 30-year mortgages have fallen to around 5.05% from 5.28% at the start of the year, according to research firm HSH Associates, even as Fed officials telegraphed the program would end soon.
- Real Time Economics (WSJ Blog) – What’s Next for the Fed and Mortgages?
What happens next? Even Fed officials would acknowledge a reasonable amount of uncertainty about how the mortgage market will function once its biggest buyer — the central bank — steps aside. Many pension funds, insurers and other institutional investors fled the market once the Fed showed up as a giant noneconomic buyer. (To reach its target, the Fed bought up not only most of the new agency MBS but also existing securities held in portfolios.) As a result, some investors have suggested over the past year that mortgage rates could shoot up by a percentage point as the Fed program ended. But if that’s the case rates should’ve started rising already given the Fed’s signals. Mortgage rates probably will rise somewhat as Treasury yields move higher in the coming months, but the spread between mortgages and government securities may not necessarily expand. (Among the market projections: Barclays Capital expects mortgage rates to rise as much as half a percentage point during the second quarter largely due to rising Treasury yields.) If the “stock” view is correct — that the Fed’s total holdings matter more than its pace of purchases — then mortgage rates should rise slowly as mortgage securities roll off the Fed balance sheet. The New York Fed’s Brian Sack last week said the Fed projects that more than $200 billion in MBS and agency debt held by the central bank will mature or be prepaid by the end of 2011. That suggests a measured tightening as the Fed balance sheet shrinks naturally over time.
- Bloomberg.com – Stiglitz Says Fed Stimulus Withdrawal May Hurt U.S.
The Federal Reserve’s decision to let its mortgage-debt purchase programs end this month risks driving up home-loan rates and worsening the housing crisis, Nobel laureate Joseph Stiglitz said. “The withdrawal of the support risks increasing the interest rate, increasing the number of foreclosures and exacerbating the strain, the stress, that American families are already facing,” Stiglitz said in an interview in Tokyo. He said officials “misjudged things,” and predicted foreclosures and bank failures this year will exceed the 2009 and 2008 totals. Stiglitz said the main dangers for the global economy are that central banks will “exit too rapidly” from measures adopted during the crisis, propelled in part by an “irrational” fear among some investors that inflation will soar. The liquidity created by central banks battling the recession isn’t likely to fuel consumer prices because of subdued consumer demand, he said.