Federal Reserve officials who favor prioritizing mortgage-backed securities when they begin to scale back asset purchases have added Governor Christopher Waller to their ranks.
The first board member to publicly come out in favor of starting the taper with MBS, Waller said that amid sharply rising house prices, it would a straightforward move to communicate.
“I think it’s an easy sell to the public,” he told Bloomberg Television during an interview on Tuesday evening with Kathleen Hays. “The housing market is on fire. We should think carefully about doing MBS purchases, and if we were to taper those first that wouldn’t necessarily be a big issue.”
U.S. pending home sales rose in May by the most in nearly a year, data released Wednesday
Fed officials have begun debating when and how to slow their monthly purchases of $80 billion in Treasuries and $40 billion of MBS, which are designed to help the economy heal from Covid-19 by keeping borrowing costs super-low.
Waller said taper timing was probably sooner than officials had anticipated at the end of 2020, owing to the strong recovery of the U.S. economy and could begin potentially before year-end.
“The market has gotten ahead of the Fed taper talk as spreads have already widened since April. The market also understands spreads will continue to move wider with tapering,” said Walt Schmidt, head of mortgage strategies at FHN Financial in Chicago. “We still need to be clear about what tapering actually means. Is it adding less to the portfolio, holding the portfolio constant or letting the portfolio runoff?”
Chair Jerome Powell has promised to give investors plenty of advance warning of any moves. Asked during an April 28 press conference about scaling back MBS before Treasuries, Powell said the purchases were not aimed at helping the housing market, but didn’t declare where he stood on the question.
Financial markets may learn more of the internal debate about the mechanics and timing of tapering when minutes of the June meeting of the Federal Open Market Committee are published July 7.
Several regional Fed presidents including Robert Kaplan of Dallas, Kansas City’s Esther George and James Bullard of St. Louis have made comments suggesting they favor starting with MBS because of worries about the housing market overheating.
Boston Fed President Eric Rosengren on June 25 suggested that when the time came to start scaling back the purchases, MBS and Treasuries could be reduced by the same amount. That would mean ending MBS purchases well before Fed buying of Treasuries.
Citigroup Global Markets chief U.S. economist Andrew Hollenhorst argued in a note to clients that the core of the Fed’s policy-setting committee seem to favor treating MBS and Treasuries equally in tapering, writing “While certainly still up for discussion, it remains most likely in our view that officials will pursue an equally proportioned taper.”
