Jan. 25 (Bloomberg) -- Federal Reserve policy makers will probably buy mortgage bonds should the economy warrant more easing, with purchases of all debt totaling $500 billion, according to economists in a Bloomberg News survey.
Forty-six percent of economists say a new round of bond buying would consist entirely of mortgage-backed securities, while 35 percent predict it would also include Treasuries. None of the 56 economists in the survey expect the central bank would purchase only Treasuries.
Chairman Ben S. Bernanke said in a Jan. 4 letter to Congress that housing is “blunting” the impact from interest rates near zero and impeding economic growth. By purchasing more mortgage bonds, Bernanke would aim to cut the cost of home loans, spurring refinancing and sales of residential properties. Most economists said they don’t expect the Fed to announce more asset purchases today.
“Housing has been a critical piece of prior recoveries, and the U.S. economy is not likely to achieve sustained above-trend growth without the participation of housing,” said Julia Coronado, chief economist for North America at BNP Paribas in New York.
The Federal Open Market Committee resumed meeting at 8:30 a.m. in Washington and plans to release a policy statement at 12:30 p.m. after a two-day meeting. At 2 p.m., the central bank for the first time will release forecasts from FOMC participants for the main interest rate, and Bernanke at 2:15 p.m. plans to hold a press conference.
Won’t Buy More
Economists are split on whether the Fed will buy more assets, with half saying they don’t expect a third round of so-called quantitative easing at any time, according to the Jan. 18-20 survey. Last month, 51 percent of surveyed economists predicted the Fed won’t engage in more purchases.
Coronado is among those predicting the Fed will take action. “They’re going to need to support the housing markets,” she said. “They’re going to use that rationale to announce a mortgage purchase program” during the second quarter.
Of the 28 analysts who foresee new buying, 17 said the purchases will begin in the second quarter of 2012. The central bank has two-day meetings on April 24-25 and June 19-20, meaning that Bernanke is scheduled to hold a press conference afterwards in which he could explain such a move.
“I would say April is more likely than June” as the date the Fed would announce bond purchases, said Dana Saporta, director of U.S. economic research at Credit Suisse in New York. “If we have a spurt in headline inflation that would make it difficult for the Fed to come in with more accommodation. That makes us think sooner is better than later.”
The central bank purchased $2.3 trillion of securities in two rounds from December 2008 until June 2011, and 10-year Treasury note yields climbed during both periods of quantitative easing. The yield climbed from 2.2 percent on January 5, 2009, when buying began, to 3.8 percent on March 31, 2010 when purchases ended. The interest rate on a 30-year mortgage hovered around 5 percent during this period.
During the second round of purchases from Nov. 12, 2010 to June 30, the yield on the 10-year Treasury note climbed from 2.79 percent to 3.16 percent. The central bank bought only U.S. Treasuries during this time.
Fed Governor Daniel Tarullo backed new purchases of mortgage bonds in an Oct. 20 speech, saying the move would offer many of the same benefits as purchases of Treasuries while having “more direct effects on the housing market.”
Bernanke described purchases of mortgage-backed securities as a “viable option” in a November press conference, while San Francisco Fed President John Williams said Jan. 10 that he sees a “strong” case for new purchases of mortgage bonds.
Chicago Fed President Charles Evans told reporters on Jan. 13 that $600 billion in purchases, the same size as the second round of quantitative easing, “would be quite a good place to start.” Mortgage-backed securities “could be a perfectly fine choice for those asset purchases,” he said.
Mortgage-bond purchases could push down the interest rate on a 30-year mortgage to between 3 percent and 3.25 percent, spurring housing sales, said John Lonski, chief economist at Moody’s Capital Markets Group in New York. The current rate is about 3.9 percent, according to Freddie Mac.
Economists’ predictions for the size of a third round of large-scale asset purchases by the Fed ranged from $200 billion to $1 trillion, with $500 billion as the median estimate.
Through such buying the Fed would target a housing sector that has yet to show signs of a sustained recovery. An S&P/Case-Shiller index of property values in 20 cities dropped 3.4 percent in the year through October, and existing home sales remain 15 percent below their 10-year average.
New York Fed President William Dudley estimated in a Jan. 6 speech that properties seized by lenders may increase to 1.8 million this year, and also in 2013, from about 1.1 million last year and 600,000 in 2010.
In contrast, the U.S. expansion has shown signs of strengthening. The Department of Commerce will report Jan. 27 that the economy grew 3 percent in the fourth quarter of 2012, according to the median estimate of a separate Bloomberg Survey of 78 economists. That would be the fastest pace since the second quarter of 2010.
The unemployment rate fell in December to 8.5 percent, the lowest since February 2009, and an index of sentiment among homebuilders increased this month to the highest level since June 2007.
“As I look ahead to 2012, I’m cautiously optimistic that we’re seeing a real bottom form and that we will begin to see signs of recovery,” Stuart Miller, chief executive officer at Miami-based Lennar Corp., said on a Jan. 11 conference call. Lennar is the third-largest U.S. home builder by revenue.
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