Fed slows $1.45T program to aid housing market
By Jeannine AversaThu Sep 24 05:24:33 EST 2009
Wed Sep 23 19:24:33 UTC 2009
WASHINGTON, Sept 23 AP - With the US economy on the mend, the Federal Reserve on Wednesday said it is slowing the pace of a program to lower mortgage rates and prop up the housing market.
The Fed decided to stretch out its goal of buying $US1.45 trillion ($A1.66 trillion) in mortgage-backed securities and debt issued by Fannie Mae, Freddie Mac and Ginnie Mae until the end of the first quarter of 2010. Originally, the central bank intended to complete buying those securities by the end of this year.
It marked the second time since August that the Fed has opted to slow some of its extraordinary support to revive the economy and spur Americans to boost spending. It shows that the Fed Chairman Ben Bernanke and his colleagues are confident the recovery will take hold.
In a more upbeat assessment, the Fed said: "Economic activity has picked up following its severe downturn." When the Fed last met in August, policymakers declared that economic activity was "levelling out."
The central bank also "expects that inflation will remain subdued for some time."
Even though the Fed will stretch out its purchases of mortgage securities, rates for home loans should remain low "in the 5 per cent range" as long as the purchases continue, said Guy Cecala, publisher of Inside Mortgage Finance.
On Wall Street, stocks rose on the Fed's more optimistic outlook. The Dow Jones industrial average, which had risen 27 points before the announcement, was up about 60 points roughly a half-hour after the statement was issued.
Policymakers on Wednesday noted other improvements - specifically that financial conditions are better and activity in the housing market increased.
To foster the recovery, the Fed also decided to hold a key bank lending rate at a record low near zero, and again pledged to keep rates there "for an extended period." Economists predict that means through the rest of this year, and perhaps into part of next year.
The central bank announced the mortgage-buying program last November, shortly after financial turmoil reached a crisis point.
The Fed has bought roughly $US775 billion ($A887.24 billion) worth of both mortgage-backed securities and debt from Fannie Mae, Freddie Mac and Ginnie Mae, which finance the vast majority of new mortgages for people to purchase homes.
By one estimate, the central bank is buying roughly 85 per cent of the mortgages issued by those companies. It's basically bankrolling mortgage lending.
By doing so, the Fed is helping provide demand for these securities - which had dried up when the crisis deepened - and forcing down mortgage rates in the process. The Fed's purchases of mortgage securities and debt have averaged roughly $US25 billion ($A28.62 billion) a week over the last six weeks.
The housing market has been propped up by the Fed's program. Rates on 30-year home loans dropped to 5.04 per cent last week, compared with 5.78 per cent a year earlier, Freddie Mac says. But the housing sector's health remains precarious as foreclosures continue to mount.
