The Federal Reserve, which meets next week to discuss their interest rate policy, is likely to stay the course to buy $1.45 trillion in mortgage loan securities despite potential resistance from a few regional Fed presidents. Central-bank officials plan to discuss winding down those purchases over the coming months to limit disruption to the market when the buying comes to an end. Some regional Fed policy makers have suggested the Fed might halt the program before it finishes its purchases of $1.25 trillion in mortgage-backed securities and $200 billion in bad credit mortgage debt from Fannie Mae and Freddie Mac announced in the past year. But they are a small minority across the Fed system. Top Fed officials believe such a move would tighten overall monetary policy at a time when they still worry about the durability of the economic recovery. The Fed has completed about two-thirds of its purchases, almost $1 trillion worth, and is likely to complete the rest unless prospects for the economy improve radically in the coming months.
At the Federal Open Market Committee’s September 22-23 meeting, the central bank’s policy makers including the 12 regional Federal Reserve presidents will assess the early signs of improvement now taking shape across the economy. Officials are encouraged by the rebound in financial-market conditions and initial indications that the housing market is coming out of its recession. But they are hesitant to bank on a strong recovery. The sizable growth expected in the third quarter is due in part to short-term effects such as companies replenishing inventories and the government’s “cash for clunkers” auto-rebate program. Higher saving by households is casting doubt on consumer spending. And even the moderate growth that Fed officials expect next year wouldn’t be enough to bring down the unemployment rate substantially. “The economy seems to be brushing itself off and beginning its climb out of the deep hole it’s been in,” San Francisco Fed President Janet Yellen said in a speech Monday. “But I regret to say that I expect the recovery to be tepid. What’s more, the gradual expansion gathering steam will remain vulnerable to shocks.” The economy has so much slack that officials expect core inflation — excluding food and energy — to drift lower next year. Barring a surge in commodity prices or inflation expectations, most Federal Reserve officials see little reason to raise mortgage interest rates from near zero in the first half of next year as futures markets have forecast recently.