The market is familiar with the Federal Reserve’s strategy to combat inflation and carefully pare back demand in a rapidly heating housing market: raise rates and reduce the central bank’s holdings of mortgage-backed securities (MBS).
These moves will help set the capital markets onto a level playing field where the Treasury market remains a foundational benchmark to other forms of capital market debt, John C. Williams, president and chief executive officer of the Federal Reserve Bank of New York said at a mortgage industry gathering on Monday.
Yet another tool is at the Fed’s disposal—purchasing mortgage-backed securities—and that tactic is not out of the question as the central bank works to promote equilibrium in the housing markets over time, Williams told Kristy W. Fercho, the 2022 MBA chair and Wells Fargo’s executive vice president and head of home lending during the presentation, formatted as a conversation.
“When you’re in an economic downturn like we were after the financial crisis, our job is to promote maximum employment, get the economy back,” Williams said before a packed session at the Mortgage Bankers Association’s Secondary & Capital Markets Conference & Expo 2022 in New York City earlier this week. “This has been proven to be a powerful tool. I have no reluctance or aversion to using that tool when it’s needed.”
Williams also reiterated the idea that the purchase of MBS is a part of the central bank’s toolkit of conventional strategies to combat disequilibrium in the capital markets, even if some market professionals do not always share that view. He did note one caveat, however.
“There is a concern that you are kind of favoring, if you will, … the housing market. The purchase of MBS is a tool that the Fed can use carefully over a longer period of time.
A gradual and strategic release of liquidity is not all that the residential real estate market needs, Williams said. Supply is another. After consumers experienced hybrid work, their desire for quality housing—for purchase and rental—has not abated, he said. Excessive demand needs to be addressed, and not be drawn out for too long, because that is driving inflation.
“We need more housing to meet demand, because demand is fundamentally better,” Williams said. “As we raise rates, obviously that is going to take some of the heat, if you will, off of the demand for housing, but I still see the fundamentals as being strong.”
Williams said his view on the housing market is reflected in the general economy, particularly the surging demand for employees without enough corresponding supply of employees to fill those openings.
“People often say you have to mute the economy to get inflation out of it,” Williams said, adding, “the first thing we need to do is get demand down to where the supply is.”
That approach doesn’t necessarily mean a weak economy should follow, he said.
