Fed will slow efforts to aid housing sector

By Craig Torres
Bloomberg News / September 24, 2009

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WASHINGTON - The Federal Reserve will slow its purchases of mortgage securities, seeking to avoid disrupting the housing market as an economic recovery takes hold.

“The Committee will gradually slow the pace of these purchases in order to promote a smooth transition in markets and anticipates that they will be executed by the end of the first quarter of 2010,’’ the Federal Open Market Committee said yesterday in a statement after meeting in Washington.

The $1.45 trillion program had been scheduled to end by the end of this year.

Chairman Ben S. Bernanke and fellow policy makers indicated for the first time since August 2008 that the economy is accelerating, even as they recommitted themselves to keeping a benchmark interest rate “exceptionally low’’ for an “extended period.’’

The statement signals the Fed will maintain its stimulus measures to secure a recovery and to reduce unemployment.

“The mortgage market has gotten a reprieve, and mortgage rates may stay low going into the spring of next year,’’ said Christopher Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York.

The committee indicated it will exit its emergency programs “only when the economy’s troubles have passed,’’ he said.

Bernanke is trying to revive lending and cut the 9.7 percent US unemployment rate while preventing a surge in inflation from the $1 trillion expansion of the Fed’s balance sheet. The central bank’s purchases and the Obama administration’s home buyers’ tax credit have helped to stabilize housing while pushing the Standard & Poor’s Supercomposite Homebuilding Index up by more than 30 percent this year.

Officials left the target rate for overnight loans between banks at a record low of between zero and 0.25 percent.

“Economic activity has picked up following its severe downturn,’’ the committee said. “Conditions in financial markets have improved further, and activity in the housing sector has increased. Household spending seems to be stabilizing, but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit.’’

The committee said monetary and fiscal stimulus, combined with stabilizing financial conditions, “will support a strengthening of economic growth.’’

Policy makers gathered a week after Bernanke said the worst recession since the 1930s “is very likely over.’’

The Fed’s “primary goal is to avoid a shock to the market by suddenly shutting the programs down all at once,’’ said Christopher Low, at FTN Financial in New York. As the Fed eases out of purchasing mortgage securities, “they’re hoping other buyers will step in to avoid a sudden increase in mortgage rates.’’

Rates for 30-year fixed home loans averaged 5.04 percent in the week ended Sept. 17. A sudden end to the Fed’s purchases might push up rates one-half to one point, said Peter Hooper, chief economist at Deutsche Bank Securities. Reducing weekly purchases and stretching them beyond the end of the year will have a more muted effect, but still push rates up at least a quarter-point, he said.