Bloomberg News

New York Fed’s Potter Says QE3 Has Lowered Mortgage Rates

November 27, 2012

Simon Potter, the Federal Reserve Bank of New York’s markets group chief, said the central bank’s third round of bond buying has had a “large effect” on mortgage bonds and has pushed down interest rates on home loans.

Fed officials calculated that buying mortgage-backed securities would trigger the “most efficient reaction” as they were already swapping short-term Treasuries for longer-term debt, Potter said today while answering audience questions after a speech at New York University’s Stern School of Business.

The central bank is buying $40 billion in housing debt each month and has pledged to keep its benchmark interest rate near zero through mid-2015 as it seeks to boost growth and reduce a 7.9 percent jobless rate. A “number” of Fed officials said at their last policy meeting that they may need to expand their monthly purchases of bonds next year, according to the minutes of the Federal Open Market Committee’s Oct. 23-24 meeting.

The latest steps have succeeded in making home mortgages less expensive, with the average fixed rate offered on new 30- year loans at 3.44 percent yesterday, down from 3.57 percent on Sept. 12, the day before the FOMC announced its third round of quantitative easing, according to Bankrate.com data.

The central bank’s large-scale asset purchases have swelled its balance sheet to $2.87 trillion, close to a record, as policy makers have sought to reduce borrowing costs.

“The Federal Reserve is obviously carrying a lot of interest-rate risk,” Potter said. Asset-purchases work by transferring that risk from market participants onto the central bank’s balance sheet, and the Fed is frequently analyzing the impact rising interest rates will have on its portfolio, he said.

The Fed has the tools to tighten policy when needed to ward off inflation, Potter said.

“The hard part will be the willingness” to use them, though the financial markets are fairly confident the Fed will raise interest rates when appropriate, he said.

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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