Fed’s Bullard Advocates Selling Mortgage Securities Gradually in 2010
The president of the Federal Reserve Bank of St. Louis said Monday the U.S. central bank should commence gradually selling its mortgage securities holdings later this year despite concerns from some investors the go would raise mortgage rates.
James Bullard said in an interview the asset sales should happen before the Fed hikes small-term interest rates, a sequencing that is still being debated within the central bank. He also said the market was putting too high the odds that the Fed’s first rate hike will come in November.
To be sure, the Fed has yet to complete the buy of $1.25 trillion in mortgage-backed securities that it plans by the end of March — part of the extraordinary measures place in house to counter the financial crisis — and is still at smallest amount several months away from tightening plot. But the central bank is already looking yet to be to when the economy will be strong sufficient to warrant tighter credit.
“If the economy stays on track, I’d expect that at some point we’d entertain the possibility of asset sales,” said Mr. Bullard, a 2010 voting member of the Fed’s plot-making arm, adding it could happen later this year. The Fed official said the asset sales should be very slow at first to test markets.
As the Fed prepares a blueprint for a credit tightening for when the economy has recovered sufficient, officials agree on the need, over time, to shrink the size of the central bank?s bloated balance sheet. They also agree that if they start selling mortgage backed securities, it should be done in a gradual way aimed at minimizing hurt to the housing market. But they?re divided on the timing and the sequence of the steps.
Mr. Bullard may not get a lot of support for his view on the latter point. He did admit that at the last meeting of the Federal Open Market Committee “a lot” of officials thought higher small-term rates should come before asset sales. Other Fed officials are concerned that selling mortgage-backed securities could hurt the housing market, which remains weak even as the U.S. economy shows increasing signs of a recovery.
Following a strong fourth quarter last year, Mr. Bullard said the recovery was on track and there was no longer a risk of a double-dip recession in the U.S. Although it will take some time for unemployment to come down, Mr. Bullard said the economy should commence to add jobs in the coming months.
But, when questioned if the Fed assets futures market was right in pricing a 90% opportunity of a hike by November, Mr. Bullard said the recovery likely won’t be strong sufficient for that.
“Frankly I reckon the economy would have to recover pretty strongly this year — better than expected — before (a rate hike) could happen in the fall,” he said.
As part of the Fed?s plans to end its liquidity programs, Mr. Bullard said the discount rate it charges banks for emergency loans could go up relatively soon in small steps. But he declined to comment on whether the St. Louis Fed had already made a request to the Fed Board in Washington for such a go.