Federal Reserve Chairman Ben S. Bernanke is gambling that by March, he can stop the purchases of mortgage-backed securities that have propped up the housing market, but Congress may have other ideas.
The central bank said it must eventually withdraw its unprecedented economic stimulus to avoid a surge of inflation as a recovery takes hold. Plans to buy $1.25 trillion of housing debt are the centerpiece of its program to pull the nation out of the worst recession since the 1930s.
Bernanke, who convened a two-day meeting of the Federal Open Market Committee on Tuesday, is counting on private investors to fill the void left by the Fed when its purchases end.
If he's wrong, he may come under pressure from politicians to maintain support for housing or even extend credit programs for small businesses and consumers. That would threaten the Fed's ability to conduct an independent monetary policy.
"The nightmare scenario for the Fed would be to see them try to sell their mortgage portfolio, and Congress steps in and tries to stop it on the grounds that the housing market hasn't fully recovered," said Ethan Harris, head of North American economics at Bank of America-Merrill Lynch. "The attempts to influence the Fed in the exit strategy will be pretty strong."
The Fed chairman has come under pressure from lawmakers to aid car companies and provide more credit to commercial real estate.
"Whenever any sector has perceived difficulties, Congress may ask the Fed to invent a new program," said William Poole, a former president of the Federal Reserve Bank of St. Louis, who is now a senior fellow at the Cato Institute, a Washington policy research group.
Fed officials said purchases of housing debt have helped lower borrowing costs, boosting the part of the economy that was at the epicenter of the economic crisis. The average rate on a 30-year mortgage was 5.03% last week, down from 6.46% a year earlier, according to Freddie Mac.
Rates on 30-year mortgages could be a full percentage point higher by March as the economy strengthens and the Fed stops its purchases, said Nicholas Strand, a mortgage-backed securities strategist at Barclays Capital Inc.
Sales of new homes unexpectedly fell in September.
"There is a question whether the housing market can survive when the fiscal props are pulled out," said Brian Bethune, chief financial economist at IHS Global Insight Inc. in Lexington, Mass.
The central bank is already the biggest buyer of mortgage-backed securities sold by Fannie Mae and Freddie Mac, with purchases exceeding new issuance by the two companies in September, according to the Mortgage Bankers Association.
Paul Krugman, a Nobel Prize-winning Princeton University economist, said Bernanke had little alternative to expanding the Fed's balance sheet.
"I'd love to see the Fed with a perfectly clean balance sheet," Krugman told reporters at a news conference in Buenos Aires Oct. 27. "I'm sure Bernanke would like that as well. But the problem is in housing. The Fed probably should continue purchasing as long as we're in this situation."