The Wilder View

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.

Originally published at the News N Economics blog and reproduced here with the author’s permission.

One Response to “MBS program is helping; Fed meets two days until 2010”

GuestFebruary 18th, 2009 at 9:23 am

Can Obama produce his promised 4% rates with this plan? By now the investement has totaled $140 Billion and the rates have resisted. With only $1.5 Trillion available, it looks to me that they could hold rates down for a couple of months and then they would run out of money? Am I being too pessimistic? Keep the udates coming, it was a joy to see this article

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