Fed to End Mortgage-Purchase Program
Fed To End Mortgage Buys Mar 31 As US Economy Gains
By Luca Di Leo and Tom Barkley
Dow Jones Newswires
(Adds details, analysts' reaction, and background, in the ninth, 13th, 16th and 17th paragraphs.)
WASHINGTON -(Dow Jones)- The Federal Reserve Tuesday said it will end one of its main support programs for the U.S. economy--purchases of $1.25 trillion of mortgage-backed securities--pushing a nascent recovery to stand with less government support.
The Fed said the economy is continuing to improve, though officials said at the conclusion of their latest policy meeting that it would still be at least several more months before they take the dramatic step of raising short-term interest rates in response to stronger growth.
The U.S. central bank said it will complete its purchases of mortgage-backed securities by the end of March, as planned, winding down a program that many economists believe was key in preventing another Great Depression.
To combat a deepening recession, the Fed slashed short-term interest rates, its main lever in managing the economy, to a record low in December 2008. When that wasn't enough, it set out to inject nearly $1.75 trillion of cash into the economy by buying long-term U.S. Treasurys, mortgage securities and debt issued by mortgage firms Fannie Mae (FNM: 1.05, 0, 0%) and Freddie Mac (FRE: 1.27, 0, 0%) in March 2009. The purchases helped to drive down a wide range of long-term interest rates.
Analysts have worried that the end of the Fed's mortgage-purchase program could lead to an upsurge in mortgage rates. But that hasn't happened, even amid months of well-telecast pronouncements that the program would end. Rates on 30-year mortgages have fallen to around 5.05% from 5.28% at the start of the year, which is when the Fed began to slow down its weekly purchases, according to HSH Associates.
The Fed ended its purchase of $300 billion Treasurys in October. The enormous mortgage program was the pillar of the Fed's money-pumping efforts, which many economists call "quantitative easing" and which Fed chairman Ben Bernanke has dubbed "credit easing."
The Fed has also wound down its emergency lending programs and the central bank said Tuesday that the only remaining such program, the Term Asset-Backed Securities Loan Facility, or TALF, is slated to close by June.
"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," the Federal Open Market Committee said in its statement Tuesday, indicating it stands ready to resume the purchases if the recovery starts to flag.
"I think the Fed wants everybody to know that they're going to wind this stuff down. But they're not so comfortable about the recovery that, if it needs another push, they'll do it," said Joel Naroff, president and chief economist of Naroff Economic Advisors.
With the conclusion of the mortgage-purchase program, attention at the Fed is likely to shift in the weeks ahead toward a momentous decision about interest rates. If the Fed raises rates too soon or too aggressively, it could undermine the recovery; but, if it waits too long, it could fuel inflation. In its policy statement, the Fed retained year-old language which states that short-term interest rates will remain "exceptionally low" for an "extended period," which means at least several more months.
Fed officials have begun to debate how and when to change that wording to signal to markets that rate increases could be coming. Worried that low rates may spur inflation, Kansas City Fed President Thomas Hoenig was again the lone dissenter, asking to drop the "extended period" language, as he did at the January meeting.
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