Bloomberg News

Bernanke Says Mortgage Bond Purchases Are ‘Viable Option’

November 16, 2011

(Updates with stocks, dollar in sixth paragraph.)

Nov. 2 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke said additional purchases of mortgage-backed securities are a “viable option” if the state of the economy warrants further easing.

“The housing sector is a very important sector,” Bernanke said today at a press conference in Washington after a meeting of the Federal Open Market Committee. Adding to mortgage-bond holdings is “certainly something we would consider if conditions” are appropriate.

The policy-setting FOMC today said “economic growth strengthened somewhat in the third quarter,” while also saying “significant downside risks” remain to the outlook. Officials left unchanged their plans to lengthen the maturity of the Fed’s bond portfolio and to keep the target federal funds rate near zero through at least mid-2013 as long as unemployment remains high and the inflation outlook remains “subdued.”

Bernanke and his colleagues on the panel cut their growth forecasts for 2012 and said unemployment will average 8.5 percent to 8.7 percent in the final three months of next year, up from a prior range of 7.8 percent to 8.2 percent.

“The medium-term outlook relative to our June projections has been downgraded” and “remains unsatisfactory,” Bernanke said. Additional stimulus “remains on the table,” he added, while declining to specify conditions that would trigger further action.

Stocks, Dollar

U.S. stocks rebounded from a two-day slump, the dollar fell and Treasuries pared losses after Bernanke’s comments.

The Standard & Poor’s 500 Index climbed 1.3 percent to 1,234.04 at 3:48 p.m. in New York. The Dollar Index slipped 0.2 percent, trimming an earlier drop of 0.7 percent. Treasury 10- year yields were unchanged at 1.99 percent, after jumping nine basis points earlier.

“I’m dissatisfied with the state of the economy,” Bernanke said. “Unemployment is far too high,” and “I fully sympathize with the notion that the economy is not performing the way we would like.”

Policy makers voted in September to swap $400 billion of short-term debt in the Fed portfolio for longer-term securities to reduce interest rates in a strategy dubbed Operation Twist. They said they would reinvest proceeds from maturing housing debt into mortgage-backed securities, switching from Treasuries.

Sixty-nine percent of economists in a Bloomberg News survey expect the Fed to embark on a third round of bond buying, with a plurality of 36 percent of respondents seeing purchases beginning in the first quarter of 2012, according to an Oct. 26- 31 survey of 42 economists.

Top of List

Fed Governor Daniel Tarullo said on Oct. 20 that buying additional mortgage bonds should “move back up toward the top of the list of options” because “the aggregate demand effect should be felt not just in new home purchases, but also in the added purchasing power of existing homeowners who are able to refinance.” The following day, Vice Chairman Janet Yellen said a third round of asset purchases “might become appropriate” if economic conditions warranted more stimulus.

“The MBS purchases and Treasury securities purchases are one set of tools that we have” along with communications, Bernanke said. “The committee will have to look at the outlook and if it judges we are falling sufficiently short of our objectives,” and “we believe monetary stimulus would be beneficial,” then the FOMC would take “corrective action.”

Home Prices

Reduced home prices and tightened lending standards have slowed the pace of replacement home loans. The Mortgage Bankers Association forecast on Oct. 11 that refinancing this year would total $783 billion, down from $1.1 trillion last year, even amid lower interest rates. Refinancing peaked at a record $2.5 trillion in 2003.

The average rate on a typical 30-year fixed mortgage fell to a record low 3.94 percent in October, from this year’s high of 5.05 percent, before climbing to 4.10 percent last week, according to Freddie Mac survey data. In September, the FOMC voted to reinvest proceeds from maturing housing debt into mortgage-backed securities, switching from Treasuries.

The central bank purchased $2.3 trillion in debt from December 2008 through June in two rounds of so-called quantitative easing aimed at lowering borrowing costs for companies and consumers with the benchmark interest rate already at zero.

The vote for today’s statement was 9-1. Chicago Fed President Charles Evans voted against the decision, the first dissent in favor of easier policy since Boston Fed President Eric Rosengren in December 2007. Evans favored “additional policy accommodation.”

At the last two meetings, Dallas Fed President Richard Fisher, Minneapolis Fed President Narayana Kocherlakota and Philadelphia’s Charles Plosser dissented against decisions to ease policy. They supported today’s statement.

“The committee will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools to promote a stronger economic recovery in a context of price stability,” the statement said.

--With assistance from Josh Zumbrun and Craig Torres in Washington, Vivien Lou Chen in San Francisco and Steve Matthews in Atlanta. Editors: James Tyson, Christopher Wellisz

To contact the reporter on this story: Caroline Salas Gage in New York at csalas1@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net


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