Fed's strategy reduces US bailout

The Federal Reserve decided to keep pumping $1.25 trillion of new money into the mortgage market to focus on rescuing the US economy as the financial system revives and banks ask for less help.

The Fed is allowing some of the 10 support programs it created or expanded after the credit crisis began in August 2007 to expire or shrink. That caused the first decline in the amount of money the US has committed on behalf of taxpayers to end the recession, according to data compiled by Bloomberg.

The central bank has purchased $694 billion of mortgage-backed securities since January and plans to spend $556 billion more by April 2010 to keep interest rates down. The debt-buying is the biggest program in the Fed’s arsenal.

 

“The first thing the Fed had to do was stop the bleeding in the banking system,” said Richard Yamarone, director of economic research at Argus Research Corp in New York. “Now that that seems to have been accomplished, they’re focusing on the economy by buying mortgage-backed securities.”

The purchases were scheduled to stop at the end of December. The Federal Open Market Committee decided on September 23 to continue the program through the first quarter of next year and slow the pace of buying to “promote a smooth transition in markets,” the committee said in a statement. It also said the economy has “picked up.”

The debt-buying pushed the average 30-year mortgage interest rate this week to 5.04 percent, its lowest since May, according to McLean, Virginia-based Freddie Mac. The debt is guaranteed by Freddie Mac and the other government-sponsored home-loan financiers, Fannie Mae and Ginnie Mae, both based in Washington.

The US has lent, spent or guaranteed $11.6 trillion to bolster banks and fight the longest recession in 70 years, according to data compiled by Bloomberg. That’s a 9.4 percent decline since March 31, when Bloomberg last calculated the total at $12.8 trillion.

The tally “ignores the fact that virtually all commitments are backed by assets,” Andrew S. Williams, a Treasury Department spokesman who had the same role at the Federal Reserve Bank of New York until earlier this year, said in an e- mail. “The Federal Reserve’s current ‘outlays’ are largely in the form of secured loans.