Federal Reserve officials are considering a new program of buying mortgage-backed securities to boost the ailing economy, though they appear unlikely to move swiftly in this direction.
The idea would be to target any new efforts by the central bank at the parts of the economy that are most severely impeding a recovery — the housing and mortgage markets — by working to push down mortgage rates.
Lower mortgage rates, in turn, could encourage more home-buying and mortgage-refinancing, and help the economy by freeing up cash for consumers to spend on other goods and services. Mortgage rates are already very low, but some Fed officials believe they might be pushed lower. Moreover, Fed officials believe their past purchase programs helped to lift stock markets, by driving investors from low-risk investments toward riskier investments.
The Fed discussions occur amid broader efforts in the government to find ways to revive housing markets and stir refinancing.
"I believe we should move back up toward the top of the list of options the large-scale purchase of additional mortgage-backed securities," Federal Reserve governor Dan Tarullo said in a speech Thursday at Columbia University.
A new Fed mortgage-bond-buying program isn't a certainty. If inflation doesn't recede as many officials expect, or if the economy picks up with surprising vigor on its own, such a program might not win broad support inside the Fed.
The most recent economic data have looked a touch stronger. In a report Thursday, for instance, the Labor Department said the number of people filing claims for unemployment insurance edged down last week.
The Fed next meets on Nov. 1 and Nov. 2. Any step toward mortgage purchases would surely face fierce opposition internally from Fed officials who believe the central bank has done all it can to revive the economy and should avoid new measures.
Three officials — Dallas Fed President Richard Fisher, Minneapolis Fed President Narayana Kocherlakota and Philadelphia Fed President Charles Plosser — dissented from central bank decisions on the two most recent easing steps, in part because of worries the measures could ultimately create too much inflation.
The Fed also faces political opposition — notably among Republicans — to more securities purchases, known by many as "quantitative easing." Texas Governor Rick Perry in August said more Fed money-pumping before the election would be "almost ... treasonous."
But supporters of mortgage-bond purchases are emerging ahead of the November meeting to state their case.
In his speech Thursday, Mr. Tarullo argued that there was a need and "ample room" for additional measures by the Fed to spur more spending and investment, and that the risk of inflation is limited. And he said housing was where the Fed should direct its attention.
"Housing continues to hang like an albatross around the necks of homeowners and the economy as a whole, with millions of underwater mortgages, a staggering inventory of foreclosed homes, and depressed levels of sales," he said.
Mr. Tarullo's comments are notable in part because he doesn't typically venture into discussions of the economy. Mr. Tarullo, who was appointed to the Fed by President Barack Obama in early 2009, is a lawyer and has focused mostly on bank regulation in his tenure at the central bank. This was his first major policy address on the economy and it put him firmly in a camp of activists at the central bank who want the Fed to do more to spur growth.
This group has become more vocal in recent months. Others have spoken out favorably about mortgage purchases recently. In an interview with The Wall Street Journal Wednesday, Boston Fed President Eric Rosengren said mortgage purchases should be on the table if the Fed needs to act again. The risks to the economy, he added, "are still on the downside" and the economy might need more assistance from the Fed.
Fed Chairman Ben Bernanke hasn't spoken out recently on mortgage purchases. In testimony to Congress earlier this month, he pointed to the housing sector as a driver of past recoveries that is missing this time. In August, he called broadly for "good, proactive" housing policies from the government.
From 2009 through March 2010, the Fed purchased $1.25 trillion worth of mortgage-backed securities in a program that Mr. Bernanke believes played an important role in healing distressed financial markets during the crisis. The Fed halted the program as it appeared the recovery was gathering steam.
At their meeting in September, Fed officials announced a modest shift in favor of mortgages. Until that meeting, the Fed had been trying to steer its overall $2.6 trillion securities portfolio away from mortgage debt and toward Treasury debt.
Some Fed officials believe the central bank shouldn't be favoring one sector of the economy — housing — over others, and thus shouldn't be in mortgage securities at all. In September, the Fed said it would halt its gradual move away from mortgages and instead would keep its mortgage holdings steady around $870 billion.
There are some practical reasons why a step toward mortgage purchases, if it happens, might not happen right away. In a parallel track to discussions about securities purchases, Mr. Bernanke is pushing the central bank toward more clearly and explicitly communicating to the public how the Fed reacts to changes in inflation and unemployment. It is a complicated debate that is unlikely to be resolved quickly. Officials might want to refrain from new bond-buying measures until that communication strategy is worked out.
But since their last meeting, many Fed officials have grown more alarmed about the persistence of high unemployment — 9.1% in September — which Mr. Bernanke has termed a national emergency.
Fed Governor Betsy Duke and New York Fed officials have been focused on the troubles plaguing the mortgage market and looked for ways to make mortgage refinancing easier, particularly for the millions of "underwater" households whose debt is greater than the values of their homes.
Nearly 28 million outstanding mortgages have interest rates above 5.1% and are in theory ripe for refinancing, according to CoreLogic, a household-finance research firm. Many of them have not been refinanced because of high fees and because homeowners have too little equity in their homes to qualify.
It is possible that lower rates would help only borrowers who already have good credit, and not underwater homeowners.
Behind the scenes, some Fed officials have been urging the Obama administration and the regulator of Fannie Mae and Freddie, the two government-owned mortgage giants, to find ways to reduce fees and other impediments that might be holding back refinancing, particularly for borrowers with impaired credit and underwater mortgages.
The Fed has no control over such fees, but it can influence overall borrowing rates. Lower rates can help offset the fees, making refinancing worthwhile.
Mortgage rates haven't fallen as much as yields on U.S. government debt this year. Yields on 10-year Treasury notes have fallen from 3.34% at the beginning of the year to 2.16%, a 1.19 percentage point decline. Mortgage rates haven't fallen as much. Rates on 30-year mortgages, for example, have fallen from 4.77% to 4.11%, a 0.66 percentage point decline, according to Freddie Mac.
Other arguments in favor of the Fed holding mortgages could reemerge. When the Fed ramped up its mortgage program in 2009, for instance, some Fed officials preferred buying mortgages to buying Treasury debt because they wanted to avoid the perception that the central bank was helping the government fund large budget deficits. Moreover, some officials worry that the Fed already owns a large portfolio of Treasury securities — roughly $1.7 trillion — that it runs the risk of becoming too large a player in that broader market.
