Fed Experiments With End to CMBS Purchases

The Federal Reserve is ending its purchase of mortgage-backed securities, a sign of confidence that the nation’s economic recovery is well underway.  At the same time, the Fed voted to retain its benchmark interest rate at approximately zero percent, because of remaining economic weakness and the lack of inflation.  According to the Fed, it will “continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability.”

By the end of March, the Fed will have bought $1.25 trillion worth of mortgage-backed securities, which have helped to keep mortgage rates at historically low levels.  In essence, the Fed is conducting an experiment by ending its purchase of mortgage securities, notes Marvin Goodfriend, formerly a research director at the Federal Reserve Bank of Richmond.  “It would like private money to come back into the mortgage market, but if the interest rate spread on mortgages over government securities that is needed to bring private money back is too high, it could impede the recovery of the housing market,” he said.  In an ideal world, Goodfriend believes the Fed would prefer a very small increase in mortgage rates.

In its announcement that the benchmark fed funds rate would not change, the Federal Open Market Committee (FOMC) said that “the labor market is stabilizing.”  This is a more optimistic assessment than was given after the Fed’s January meeting, when the FOMC said “the deterioration in the labor market is abating.”

According to the FOMC, “Household spending is expanding at a moderate rate but remains constrained by high unemployment, modest income growth, lower housing wealth and tight credit.  Business spending on equipment and software has risen significantly.  However, investment in non-residential structures is declining, housing starts have been flat at a depressed level, and employers remain reluctant to add to payrolls.”