Federal Reserve: Banks are more risk than risk-free
The Federal Reserve’s decision to buy U.S. mortgage-backed securities in a bailout of the nation’s largest bank, the nation´s largest lender, means the banks are more risky than they have been since the financial crisis.
The central bank has also raised rates and signaled that it is willing to tap its $3.6 trillion balance sheet.
The decision to sell mortgage-based securities for a smaller amount than originally expected and to increase rates, which were initially scheduled to be 0.25 percent, is a significant move by the Fed that could boost the economy.
But the move is not without risks.
The risk premium in mortgage-related assets was already high, and if the Fed buys mortgage-linked securities, that risk will increase, said Michael Tiedemann, chief investment strategist at TD Ameritrade.
The cost of those bonds is still expected to be about 1.8 percent of the total amount of mortgage-lending debt outstanding, which is still higher than the Federal Reserve had originally projected.
In an effort to ease market pressure, the Fed on Tuesday reduced its target range for the rate on mortgage-sales to a range of 2 percent to 2.5 percent, according to data compiled by Bloomberg.
The Fed said it also reduced its forecast for mortgage-rate growth over the next five years to 1.7 percent to 1 percent.
That will be down from 2.8 to 2 percent and represents the first decrease since October 2016.
The market will not be in the market for the full range of mortgage rates until the Fed releases its next economic outlook in December.
The outlook, which will be released before the end of the year, is likely to be revised upward by a couple of percentage points or more, said Robert Kiyosaki, senior director of mortgage derivatives at Nomura Holdings Inc., the largest mortgage broker in Japan.
In addition, mortgage rates will be a factor in the decision-making process by the Federal Open Market Committee on Wednesday, which makes its final decisions on Thursday, said Tiedeman.
While some of the risks associated with the U.N. resolution could be mitigated by the purchase of mortgage bonds, the decision to hold off on the increase in interest rates on mortgage securities is a big move that is likely not to last long, said Jonathan Goldblatt, an analyst at JPMorgan Chase & Sullivan LLP in New York.
The Federal Open Service Fund, which oversees U. S. government bonds and other debt issued by U.s. government agencies, also is unlikely to get the benefit of the Fed´s bond purchases, which are expected to bring down rates on the bonds.
The U.K.-based fund said that it expects the U