Three Fed Presidents Call to Phase Out Mortgage Bond Buys

Three Federal Reserve regional bank presidents called for phasing out the Fed’s monthly purchases of $40 billion in mortgage-backed securities as the housing recovery shows signs of gaining momentum.

Dallas Federal Reserve Bank President Richard Fisher said today buying mortgage bonds risks disrupting the market, while Philadelphia Fed President Charles Plosser said, “it’s not good for the bank to be holding lots of mortgage paper.” Jeffrey Lacker of Richmond said to reporters yesterday the Fed should “get out of the credit allocation business.”

The Federal Open Market Committee said May 1 it will keep up its monthly purchases of mortgage bonds and $45 billion in Treasuries, and is ready to increase or reduce the pace in response to changes in the outlook for inflation and the labor market. Plosser, Lacker and Fisher don’t hold a policy vote this year.

The central bank’s so-called quantitative easing has pushed mortgage rates close to record lows, fueling demand in some housing markets as buyers compete for a tight supply of properties. While values remain well below their peak, 133 of the 150 metropolitan areas tracked by the National Association of Realtors had price increases in the first quarter from a year earlier. Areas such as San Francisco, Atlanta, Phoenix and Reno, Nevada, saw jumps of at least 30 percent.

“When refinancing activity eventually shifts down, the Fed could soon be buying up to 100 percent of MBS issuance if the current purchase program continues,” Fisher said today in a speech in Houston. “Buying such a high share of gross issuance in any security is not only excessive, but also potentially disruptive to the proper functioning of the MBS market.”

‘Reasonable Step’

Lacker said yesterday the central bank should reinvest the principal from its mortgage bond holdings into Treasuries. “That would be a really reasonable step to contemplate at this point given the strength in the housing market right now,” he said to reporters in Baltimore.

Starts of new U.S. homes fell more than forecast in April to a five-month low, indicating a pause in the industry’s progress as builders slowed work on apartments. Building permits surged to an almost five-year high.

Housing starts slumped 16.5 percent, the most since February 2011, to an 853,000 annualized rate after a revised 1.02 million pace in March, the Commerce Department reported today in Washington. The median estimate of 81 economists surveyed by Bloomberg was for a 970,000 rate.

Plosser said today in a Bloomberg Television interview he “would like to see us get out of mortgage-backed securities.”

Outspoken Opponents

Fisher said in response to audience questions he wants to see the central bank’s balance sheet eventually returned to an all-Treasuries portfolio. While Fisher has been one of the most outspoken opponents to bond buying among Fed officials, he said in February he didn’t want to stop purchases “cold turkey,” which could destabilize the market.

“The housing market is on a self-sustaining path and does not need the same impetus we have been giving it,” Fisher said today to the National Association for Business Economics in Houston. With the success of continued buying “questionable,” he said, “I think we can rightly declare victory on the housing front and reel in -- or dial back -- our purchases, with the aim of eliminating them entirely as the year wears on.”

Fisher said he was encouraged by recent economic data and believes growth will probably exceed private economists’ forecasts of 2.4 percent this year. The housing market is on the rebound, banks are easing lending standards and state and local government cutbacks are no longer a major drag on growth, he said.

Downward Trend

The jobs report for April as well as a downward trend in initial claims for unemployment insurance may have signaled an improvement in the labor market as well, the Dallas Fed chief said. Employment picked up more than forecast in April, and the jobless rate unexpectedly declined to a four-year low of 7.5 percent, a Labor Department report showed on May 3. Revisions added a total of 114,000 jobs to the employment count in February and March.

More Americans than projected filed applications for unemployment benefits last week. Jobless claims jumped by 32,000 to 360,000 in the week ended May 11, exceeding all forecasts in a Bloomberg survey of economists and the most since the end of March, Labor Department figures showed today in Washington.

The yield on the 10-year Treasury note dropped six basis points, or 0.06 percentage point, to 1.88 percent at 12:12 p.m. in New York, according to Bloomberg Bond Trader prices. The Standard & Poor’s 500 Index was little changed at 1,658.20.

Unexpectedly Advanced

Sales at U.S. retailers unexpectedly advanced in April, Commerce Department figures showed this week. Fisher called the figures “a nice upside surprise.”

“This indicates that consumers may have digested delayed tax rebates and the increase in payroll taxes and are reaping the benefits of lower gasoline and food prices,” he said. “So the recovery presently appears to be strong enough to propel hopes that employment growth will continue improving over the near term.”

Inflation reports have been benign, with price measures likely to end the year between 1.5 percent and the Fed’s 2 percent goal, Fisher said.

Labor Department figures today showed the cost of living fell in April for a second month, the first back-to-back declines in inflation since late 2008, as fuel prices retreated. The consumer-price index decreased 0.4 percent, the biggest decrease since December 2008, after falling 0.2 percent in March.

Further Decline

Some Fed officials, including St. Louis Fed President James Bullard, said last month that a further decline in inflation that persisted might warrant additional stimulus. Consumer prices rose 1 percent in March from a year earlier, the lowest level since October 2009, according to the Fed’s preferred gauge of inflation.

Inflation that has “persistently” stayed below the Fed’s goal is a concern and may suggest policy hasn’t done enough to support growth, Boston Fed President Eric Rosengren said today.

“The longer we in the U.S. remain so far below our 2 percent target, the greater the risk that inflation expectations could fall and real interest rates rise,” Rosengren said in a speech in Milan. Low inflation and high unemployment “could lead one to argue that policy has not been sufficiently accommodative.”

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