Thursday 24th of September 2020

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Fed Will Slow Its Mortgage Securities Purchases

In a measure to prevent harming a housing market that is recovering while the overall economy is improving, the Federal Reserve will decrease its rate of mortgage securities purchases.

“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 Wednesday after meeting in Washington, D.C. The $1.45 trillion program originally was set to conclude at the year’s end.

The Fed’s purchases combined with the administration’s tax credit for homebuyers are credited with stabilizing the housing market and leading the Standard and Poor’s Supercomposite Homebuilding Index to increase more than 30 percent this year.

Policy makers also said they will maintain the “exceptionally low” benchmark interest rate for an “extended period” of time. This is a sign the Government will keep its economic stimulus measures in place to enhance an economic recovery and reduce the jobless rate.

Chairman Ben S. Bernanke has been attempting to stimulate lending and trim the 9.7 percent unemployment rate while heading off an inflation jump from the $1 trillion growth of the Fed’s balance sheet.

“Economic activity has picked up following its severe downturn,” the Government said. “Conditions in financial markets have improved further, and activity in the housing sector has increased.”

The Fed has purchased about $862 billion of its $1.25 trillion in agency mortgage-backed securities and $129.2 billion of a $200 billion program in U.S. agency bonds. Business in the housing industry picked up after it shaved an average of 1 percentage point quarterly from gross domestic product since the start of 2006.

Indicating a stronger effort to help housing markets, officials said they will buy a total of $1.25 trillion in mortgage-backed securities. In August, they said they could purchase up to that amount.

Thirty-year fixed mortgage rates averaged 5.04 percent in the week ended Sept. 17. That’s down from 5.07 percent reported the previous week, according to Freddie Mac, a government-controlled mortgage-finance company. Officials also kept the target rate for overnight loans between banks at a record low of zero and 0.25 percent.

Still, there is a need for more improvement. “Household spending seems to be stabilizing, but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit,” the Fed said.

Monetary and fiscal stimulus added to financial conditions that are settling down “will support a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability.”

Some economists noted it will be difficult for the Fed to end its stimulus measures. However, using them for too long could trigger inflation.