Could More Fed Mortgage-Bond Purchases Be on the Horizon?: The Ticker

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By Paula Dwyer

Federal Reserve Chairman Ben S. Bernanke was his usual circumspect self, but the markets think he hinted pretty strongly today of more mortgage-bond purchases in the near future.

The Standard & Poor's 500 index, after a two-day slump, jumped 1.3 percent within 45 minutes of Bernanke's news conference. By the close of trading, the S&P was up 1.6 percent. The dollar fell and Treasuries also reduced losses following the chairman's comments, even though the Fed also cut its 2012 growth forecast today.

The excitement stems from two places. The vote for today's Federal Open Market Committee statement -- which was slightly more positive than the one in September but otherwise little changed -- was 9-1. The sole dissent came from Chicago Fed President Charles Evans, who favored more stimulative action. That marks the first dissent in favor of easier policy since December 2007.

Three regional Fed presidents who had dissented against easing policy at the last meeting all supported today's FOMC statement. The statement said "economic growth strengthened somewhat in the third quarter," but also noted that "significant downside risks" remain.

The second source for market optimism came from Bernanke himself. In the press conference, he called new purchases of mortgage-backed securities a "viable option" if economic conditions warrant it. Buying MBS is "certainly something we would consider," he said.

The Fed previously purchased $2.3 trillion in debt during its quantitative easing period. Buying mortgage bonds is aimed at lowering interest rates on corporate and consumer loans at a time when the benchmark interest rate is already near zero. It also tends to steer investors into the stock market.

(Paula Dwyer is a member of the Bloomberg View editorial board.)

-0- Nov/02/2011 21:35 GMT