By Steve Matthews and Vivien Lou Chen
Jan. 27 (Bloomberg) -- The Federal Reserve may take a chance the housing market can stage a comeback without its support by announcing today it will stick to the plan to end a $1.25 trillion program of mortgage-debt purchases in March.
Fed Chairman Ben S. Bernanke and other policy makers meet after the sixth straight monthly gain in home prices in November added to signs housing is stabilizing. With financial markets rebounding, the central bank has said it plans to end emergency aid to bond dealers and money markets by Feb. 1.
The Fed will probably acknowledge growth accelerated last quarter while noting that tight credit and unemployment near a 26-year high still pose risks to the recovery. Officials are likely to maintain a pledge to keep interest rates low for “an extended period” as they look for evidence of a sustained expansion that will create jobs without raising inflation expectations, former Fed governor Lyle Gramley said.
“The Fed wants to sit still until the smoke clears,” said Gramley, a senior economic adviser to Potomac Research Group. “To change the ‘extended period’ language would send a signal to markets that a tightening is not far off, and I don’t think the Fed wants to do that,” Gramley said. He doesn’t expect a rate increase for at least six months.
The Federal Open Market Committee, gathering while Bernanke awaits a Senate vote on whether to confirm him for a second term, is scheduled to issue its statement at around 2:15 p.m.
Regional Fed presidents have differed over whether to continue buying mortgage-backed securities after March 31, with James Bullard of St. Louis saying the central bank should create such an option and Philadelphia’s Charles Plosser saying the purchases should end as scheduled.
Backed by Government
The Fed plans to buy $1.25 trillion of mortgage-backed securities sold by government-backed, housing-finance firms Fannie Mae, Freddie Mac and federal agency Ginnie Mae, along with $175 billion of corporate debt issued by Fannie, Freddie and the government-chartered Federal Home Loan Banks.
During the current meeting “the real discussion will be when they end the MBS program,” said former Atlanta Fed research director Robert Eisenbeis, using the acronym for mortgage-backed securities.
“This raises a huge risk to the recovery,” said Eisenbeis, now chief monetary economist at Cumberland Advisors Inc. in Vineland, New Jersey. “You don’t want to risk cutting off the recovery in housing by essentially pulling the rug from under it.”
The Fed’s purchases have helped reduce mortgage rates by a range of a 25 basis points to 75 basis points, Boston Fed President Eric Rosengren said through Thomas Lavelle, a spokesman. A basis point is 0.01 percentage point.
Large Portfolio
Rates won’t increase by an equal amount after the end of purchases because the Fed will continue to hold a large portfolio of mortgage-backed securities, Rosengren said.
Eisenbeis disagreed, saying mortgage rates could rise by 75 basis points to 100 basis points.
The rate for 30-year fixed U.S. home loans, which reached a record low of 4.71 percent last month, was 4.99 percent in the week ended Jan. 21, according to mortgage finance company Freddie Mac.
“Housing is so heavily dependent on the Fed right now,” said Sung Won Sohn, former chief economist at Wells Fargo & Co. and now an economics professor at California State University- Channel Islands in Camarillo, California.
“The important thing for them is not to rock the boat and leave themselves plenty of flexibility so that in February and March they can alter their position if they need to,” he said.
Home-Price Index
The S&P/Case-Shiller home-price index increased 0.2 percent in November, the sixth consecutive gain, the group said yesterday in New York. The index was down 5.3 percent from November 2008, more than anticipated and the smallest year-over- year decline in two years.
U.S. central bankers, after reducing the main interest rate to a range from zero to 0.25 percent, switched last year to asset purchases and credit programs as the primary policy tools. The Fed has expanded its balance sheet to $2.24 trillion at the end of 2009 from $879 billion at the start of 2007. Since March, the FOMC has said “exceptionally low” rates are likely warranted for “an extended period.”
Bullard, who votes this year on policy, said in a speech in Shanghai this month the Fed should adjust asset purchases based on changes in the economy. Chicago Fed President Charles Evans told reporters Jan. 13 that the central bank would consider expanding purchases “if conditions were to deteriorate.”
In contrast, Kansas City Fed President Thomas Hoenig, who also votes on policy this year, said in a Jan. 11 interview that “the private market now is healing” and the program should end. Richmond Fed President Jeffrey Lacker said last month, “I think we have to move over time away from channeling resources to the housing market.”
Unexpected Loss
Policy makers will likely note continued “slack” in labor markets following last month’s unexpected loss of 85,000 jobs. The FOMC projects the unemployment rate will be between 9.3 percent and 9.7 percent in the fourth quarter of this year, according to forecasts released after its November meeting.
“It’s still too early to expect a dramatic announcement with regard to the Fed’s exit strategy because the economy is still finding its footing,” said Alan Skrainka, chief market strategist for Edward Jones & Co. in St. Louis, which oversees $500 billion in stocks, bonds, and mutual fund assets.
“It’s a delicate balancing act,” he said. “If the Fed pulls back too soon, the economy falters. If the Fed waits too long, the inflation risk grows.”
The central bank will probably continue to describe inflation as “subdued” and inflation expectations as “stable,” economists said. The Fed’s preferred price measure, which excludes food and fuel, climbed 1.4 percent in November from a year earlier.
To contact the reporters on this story: Steve Matthews in Atlanta at smatthews@bloomberg.net; Vivien Lou Chen in San Francisco at vchen1@bloomberg.net.
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