Fed’s Duke Sees QE Purchases Driving Housing Market ReboundJoshua Zumbrun, Vincent Del Giudice and Aki Ito
Federal Reserve Governor Elizabeth Duke said the improving housing market shows that the central bank’s $85 billion in monthly purchases are working to boost the economy.
“Monetary policy has clearly set the stage for a revival of the housing market,” Duke said today according to prepared remarks of a speech in Avon, Colorado. “Record-low interest rates have sparked interest in homebuying. Monetary policy has contributed significantly to the recent improvement in the labor market and thereby begun to ease one of the main sources of weak housing demand.”
Duke’s remarks follow a Labor Department report today showing the economy added 236,000 jobs in February and the unemployment rate fell to 7.7 percent, the lowest since December 2008. Her remarks that the improving housing and labor markets show the Fed’s asset purchase program is working add to those of Fed Chairman Ben S. Bernanke and Vice Chairman Janet Yellen extolling the program.
Today’s employment report was “strong in a number of dimensions, but it was only one data point,” Duke said in response to a question from the audience after the speech. She would “like to see the improvement continue” and major economic indicators this year “have been on the strong side,” she said.
Duke backed the central bank’s decisions to begin purchasing $40 billion a month of mortgage-backed securities in September and to add $45 billion a month of Treasury purchases in December.
“The additional impetus to housing from MBS purchases is appropriate for at least three reasons,” Duke said, citing the “extraordinary damage” that housing suffered, as well as the subdued contribution to growth from housing investment, and tight standards for mortgage credit.
Duke said that purchases in the MBS market also posed unique challenges that the Fed would have to consider over time.
“While the purchase of agency MBS has some special efficacy in supporting housing markets, the peculiarities of the MBS market itself present some potential market functioning issues that bear monitoring,” Duke said. “The MBS market is not as deep or as liquid as the Treasury market, and the total size of the market is not growing as quickly.”
Duke said that if the Fed’s large presence began causing distortions in the MBS market “it is entirely possible that it might be appropriate at some point to adjust the pace of MBS purchases” and that “such an adjustment could result in an increase or decrease in the pace of total asset purchases, or it could lead to a change in the composition of purchases.”
Policy makers have pushed the Fed’s benchmark interest rate close to zero and expanded Fed assets to a record $3.11 trillion to spur the expansion and reduce unemployment. The moves have helped reduce mortgage rates to record lows, boosting demand for homes.
The average 30-year fixed rate mortgage hit a record low 3.31 percent on Nov. 22 and has since risen to 3.52 percent. Home prices rose 6.8 percent in 2012, according to the Case-Shiller 20-City index.
“I am optimistic that the housing recovery will continue to take root and expand,” Duke said at the Mortgage Bankers Association Mid-Winter Housing Finance Conference. “While low mortgage rates are helping support the recovery, I believe it will be the pent-up demand of household formation unleashed by improving economic conditions that will provide real momentum.”
Duke also said the Fed may need to revisit parts of its plan to unwind its record stimulus by eventually selling its holdings of mortgage bonds.
“We could reach a point where market functioning concerns begin to outweigh the efficacy of such purchases,” said Duke. “Or we might conclude that sales of MBS in volumes sufficient to meet the parameters of the exit strategy principles might create significant market disruptions. In either case, I think we should consider alternatives, such as holding the securities for longer or allowing them to roll off more gradually.”
Duke devoted much of her speech to analyzing the causes of tight mortgage credit. She cited lenders operating at capacity in part because of refinancing applications, uncertainty about yet-to-be-finalized mortgage rules from regulators, and “lender fears about the economy and the trajectory of house prices.”
“Economic improvement will cause household formation to increase, but if credit is hard to get, these will be rental rather than owner-occupied households,” she said.
Duke, 60, was a director at the Richmond Fed from 1998 to 2000. She was appointed a Fed governor by President George W. Bush and took office in August 2008. Her term as Fed governor expired in January, 2012. Duke can remain in office until a successor is appointed.