Jun 30, 2021 - Economy

If the Federal Reserve stopped buying mortgages

Data: S&P CoreLogic Case-Shiller; Chart: Axios Visuals
Data: S&P CoreLogic Case-Shiller; Chart: Axios Visuals

With home prices surging, some Federal Reserve officials have made the case for the central bank to back out of the mortgage securities market.

Why it matters: The Fed has been purchasing $40 billion worth of mortgage-backed securities (MBS) each month in an effort to keep interest rates steady and bond markets very liquid.

The big picture (depending on who you ask): Ending MBS purchases could hinder the housing market causing prices to fall, or ending the MBS purchases wouldn’t do much to prices because they weren’t specifically targeting that market in the first place.

What they’re saying: The Boston Fed’s Eric Rosengren warned to the FT that “boom and bust cycles” in housing threaten the rest of the economy, reiterating his earlier statements that the mortgage market didn’t need the Fed.

  • The Dallas Fed’s Robert Kaplan and the St. Louis Fed’s James Bullard agree.
  • Allianz chief economic adviser Mohamed El-Erian is more blunt, telling Axios, "It is very difficult to argue with any foundation that this red-hot housing market needs continued support in the form of monthly Fed purchases of mortgage securities."
  • "The benefits of the Fed maintaining its purchases are more than offset by the costs and risks, be it to the functioning of the housing market or to financial stability and the wellbeing of the overall economy.”

Between the lines: While some argue the Fed risks instability down the road, long-time Fed watcher Matthew C. Klein argues that these purchases are why there isn’t more financial instability today.

  • "The Fed's mortgage bond buying isn't targeting the housing market specifically, but interest rate volatility more generally," Klein tells Axios. "The Fed is effectively absorbing interest rate volatility on its own balance sheet."

The intrigue: SGH Macro Advisors economist Tim Duy argues that if MBS purchases aren't intended to specifically juice housing, then ending those purchases shouldn’t disproportionately affect home prices. So, an attempt to address the "bad optics" of high home prices may fail because prices may not fall.

What’s next: Most economists expect the Fed to announce its plan to taper its purchases of MBS and Treasury securities by the end of the year, perhaps as soon as the Jackson Hole symposium in late August.

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