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What exactly is the Fed buying?

September 13, 2012: 4:55 PM ET

Fed Reserve chairman Ben Bernanke said by buying mortgage backed securities, the Fed could push mortgage rate even lower.

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.

Related: Federal Reserve launches QE3

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."

Some are beginning to think quantitative easing could go on forever.
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