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Fed Sees Signs of Recovery, Confirms Withdrawal from MBS Market

The Federal Reserve offered its most upbeat economic outlook in nearly a year at the conclusion of its regular two-day policy meeting Wednesday.

After emerging from the closed-door assembly, the Fed committee issued a statement that touted improvements in the labor market and business spending, but cautioned that “recovery is likely to be moderate for a time.”

Taken directly, it may not sound like a rave review, but when you compare it to what Fed officials have been saying since last April-“Economic activity is likely to remain weak for a time”-it’s certainly an improvement.

Even with the rosier outlook, the Federal Reserve committee voted to keep the target range for its benchmark federal funds rate at 0 to 0.25 percent, and noted that “economic conditions…are likely to warrant exceptionally low levels of the federal funds rate for an extended period.”

The decision to maintain the near-zero rate, though, was not unanimous – the first dissenting vote among Fed policymakers since January 2009, according to a CNN report. Thomas M. Hoenig, Kansas City Fed president, felt

economic conditions had improved enough to make exceptionally low rates “no longer warranted,” according to the central bank’s statement.

Fed officials are holding to their plans of pulling back from the secondary market in the coming months. The committee confirmed that its program to purchase mortgage-backed securities (MBS) and debt from the GSEs will come to a close on March 31, as previously signaled. By that time, the Fed says it will have bought $1.25 trillion of MBS and about $175 billion of agency debt. The Federal Reserve has already begun to slow the pace of these purchases to help facilitate a smooth transition when the agency makes its exit.

Michael S. Barr, assistant secretary of the Treasury, says now that markets have begun to stabilize, private participants will start to return when the Fed withdraws its support. He told the Washington Post, “I’m not going to say there will be no effect on rates,” but it should be an orderly transition.

The Fed said it will also be closing a number of its temporary credit facilities over the next few months. The anticipated expiration dates for the Term Asset-Backed Securities Loan Facility (TALF) remain set at June 30 for loans backed by new-issue commercial mortgage-backed securities and March 31 for loans backed by all other types of collateral.

The Fed’s meeting adjourned a day before its top central banker, Ben Bernanke, learns if he will continue as the agency’s chairman after Sunday, when his current term expires. The Senate has scheduled a key vote for Thursday that could instill the Great Depression scholar for another four years, although approval is not a slam dunk. A growing faction of Democrats have already indicated they will not support Bernanke’s reinstatement.


Author: Carrie Bay Date: 01/27/2010 Category: Government, Secondary Market Users: Agents & Brokers, Attorneys & Title Companies, Investors, Lenders & Servicers, Service Providers

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