Saturday, February 14, 2009

MBS program is helping; Fed meets two days until 2010

Two (other) things from the Fed this week.

First, the Fed bought $23.22 billion in mortgage-backed securities (MBS) this week for a total of $114.96 billion. The assets acquired through the MBS purchase program, except for $7.38 billion, have not settled on balance yet. Therefore, the asset-side of the Fed's balance sheet, currently $1.88 trillion and down $10.33 billion since last week, does not represent the Fed's assets in full.
The goal of the MBS program is to improve conditions in the home and mortgage markets. Nominal mortgage rates tend to move up and down with Treasuries; this is the spread. If the Fed program, which targets the mortgage market directly, was improving mortgage conditions, we would expect to see the following: (1) mortgage rates may fall, and (2) spreads against Treasuries should tighten.

Since the Fed's initial MBS purchase (the week of January 5), the rate on a 30-yr conventional mortgage has increased somewhat, 0.15%. However, spreads are tightening: 53 bps against the 10-yr Treasury, and 79 bps against the 30-yr Treasury.

This is a sign that the Fed's MBS purchase program is indeed improving conditions in the mortgage market. By the way, you can download the data from the Fed here (go to selected interest rates, H.15).

Second, the Federal Open Market Committee (FOMC) - the committee that sets the federal funds target - beefed up its schedule of meetings throughout January 2010. The next eight FOMC meetings are now scheduled to last two days instead of one.

This is kind of interesting. The federal funds target is near zero, and therefore, the FOMC in full doesn't have a lot to discuss on that front. In contrast, the Board of Governors - five members of the FOMC (should be 7) - do have a rather large agenda to converse/debate: the Fed's balance sheet and credit easing policy (basically raising the balance sheet through reserve creation in order to extend credit and purchase various types of assets). The 10 FOMC members (should be 12) will discuss Fed policy, but the ultimate policy decisions lie in the Board's hands.

Rebecca Wilder

1 comment:

  1. Glad to hear the mortgage market is improving. There was an interesting comment about the real estate market in Phoenix. Someone thinks it has hit the bottom. Maybe mortgages are more available but more people are losing their jobs. Obama is due here on Wednesday to announce what he has planned for the people caught up in the mortgage mess.
    Is it a good thing that the FOMC has little to no wiggle room?