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The Fed’s Bond Buyup: Insiders Doubt Its Benefits

IHI5-16-13t’s going forward. No, it’s slowing down. No, wait, it’s picking up speed. The Federal Reserve’s rollercoaster ride of buying up mortgage backed securities and treasury bonds has been going on since last fall, with often-changing plans to scale it back or ramp it up depending on ever-evolving conditions in the housing market it’s intended to prop up. Now, amid speculation in recent weeks that the program would need to keep up the pace of purchases rather than slow down, some regional Federal Reserve officials are calling for an end to the plan.

According to a recent Bloomberg report, the bank presidents of the Dallas, Richmond and Philadelphia regional branches of the Federal Reserve Bank have stated openly that the Fed’s actions to stimulate the housing market could end up having the opposite effect.

The Fed began buying up mortgage securities and Treasury bonds in the fall of 2012 as part of an effort to keep mortgage interest rates low and boost the housing recovery. The buyup, at a rate of over $40 billion a month, had no defined endpoint, with the option of either stepping up or sowing down the rate pf purchases in response to the ebb and flow of the housing market and the economy in general.

In the early months of 2013 representatives of the Fed were reportedly considering scaling back the mortgage securities purchase plan because the housing recovery appeared to be headed for more solid ground. But new fears of a looming housing bubble kept the program moving full steamy ahead, with the option to step up the pace if the market shows signs of slowing down.

The problem, say regional bank officials, relates partly to the sheer scope of the buyup. If housing activity does slump, they say, the Fed could end up holding billions of dollars worth of one kind of commodity with no place to put it. A better plan, in their view, would be to downshift from buying mortgage backed securities and refocus on Treasury bonds for long-term stability And because the securities plan pushes interest rates artificially low, it may actually be skewing the housing recovery’s natural trajectory.

But even those who advocate abandoning the securities buyup acknowledge that the program can’t be stopped cold turkey – a move that would most likely destabilize the market. A gradual phasing out would allow interest rates to equalize naturally and help to avoid another housing crash. What’s more, they say, the overall economic picture seems to be improving signaling less need for this kind of large-scale intervention.

Regardless of the reservations expressed by some of the Fed’s own representatives, the securities buyout isn’t likely to end anytime soon. But because it plays a major role in keeping the housing market stable, investors following Jason Hartman’s recommendations for building wealth through real estate may want to keep an eye on its ups and downs. (Top image:Flickr/gorfor)

The Heroic Investing Team

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