When Federal Reserve policy makers start to curb $85 billion in monthly bond buying, possibly before the end of the year, the last thing they want to do is spoil the nascent U.S. housing recovery.
That means the Fed may concentrate first on trimming purchases of Treasuries, while continuing to buy mortgage bonds to keep a lid on interest rates for home loans.
“There is a valid case to slow down Treasury purchases before MBS purchases,” said Roberto Perli, a partner at Cornerstone Macro LP in Washington and a former economist for the Fed’s division of monetary affairs. “The recent sharp increase in mortgage rates poses a threat to the housing recovery, and a continued housing recovery is necessary if the economy is to stay on a more robust trajectory.”
Policy makers led by Fed Chairman Ben S. Bernanke have said in the last two months that the central bank’s mortgage-backed securities program has helped the economy, with Boston Fed President Eric Rosengren urging reduction first in Treasury buying and San Francisco Fed’s John Williams saying mortgage buying was “more powerful.”
Minutes of the Federal Open Market Committee’s June 18-19 meeting, released yesterday, showed about half of the 19 participants wanted to halt bond purchases by year end. At the same time, the minutes showed many Fed officials wanted to see more signs employment is improving before backing a slowing in the pace of the purchases, known as quantitative easing. Bernanke said in a speech hours later that the U.S. economy needs “highly accommodative monetary policy for the foreseeable future.”
Stocks rallied, sending the Standard & Poor’s 500 Index above its record closing level, and bonds advanced on Bernanke’s comments. The S&P 500 gained 1.4 percent to 1,675.02 at the close in New York.
The European Central Bank provided guidance similar to the Fed’s in a statement today saying its commitment to keep interest rates low for an extended period of time uses a “flexible horizon” and will depend on the euro area’s economic performance.
The latest reading on the U.S. labor market showed the number of Americans filing for unemployment benefits unexpectedly increased by 16,000 to a two-month high of 360,000 last week, during a period when applications fluctuate because of automobile plant shutdowns and the Independence Day holiday.
Consumer sentiment climbed for a fourth straight week, reaching the highest level in more than five years as Americans grew more upbeat about their finances, according to the Bloomberg Consumer Comfort Index.
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