What exactly is the Fed buying?September 13, 2012: 4:55 PM ET
The Federal Reserve is opening its wallet even wider with its latest round of quantitative easing. But this time around, the Fed is expanding its purchases of agency mortgage-backed securities as opposed to just buying more Treasury bonds.
So that begs the question: What the heck are agency mortgage-backed securities?
These bonds are backed by cash flows from mortgages guaranteed by the likes of Fannie Mae and Freddie Mac (remember them?) as well as the less-troubled Ginnie Mae.
By buying $40 billion more in agency mortgage-backed securities every month, the Federal Reserve will become the majority owner of all of these assets. Roughly $120 billion to $125 billion are issued each month. The Fed already was purchasing about $25 billion a month.
Federal Reserve chairman Ben Bernanke said the central bank could continue the mortgage buying program or even expand it in a press conference Thursday afternoon.
With mortgage rates already at all-time lows, Bernanke also said they could fall further. "This should drive down mortgage rates and create more demand for homes and for more refinancing," he said.>
Dave Ballantine, a principal at mutual fund company Payden & Rygel, agrees: "There's very little risk in buying mortgages when they're coming out and telling you they'll be buying a lot for a long time."
The Fed's monthly bills are getting pretty high, as it plans to spend $85 billion a month on "long-term" securities (including mortgages) through the end of 2012. More importantly, the Fed didn't set an end date for purchasing these mortgages or Treasuries.
In its release, the Federal Reserve said: "If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability."