Fed support for mortgage rates to end?

The Federal Reserve remains on course to wind down its purchases of mortgage-backed securities at the end of March, but would consider resuming them if mortgage rates shoot up with unintended consequences for the economy, a Fed official says.

The ongoing Fed purchases, which are expected to total $1.25 trillion by the end of next month, are widely credited with keeping mortgage interest rates near historic lows.

William Dudley, president of the Federal Reserve Bank of New York, told the National Business Report last month that there will probably be "a little bit of upward pressure on interest rates" when the program ends.

"But there's a big debate about whether they'll be small or medium or large," he said. "So I think we'll have to wait and see."

In a Jan. 12 forecast, the Mortgage Bankers Association projected that rates on 30-year fixed-rate mortgages will rise from an average of 4.9 percent during the final quarter of last year to 6.1 percent in the final quarter of this year, 6.3 percent in the final quarter of 2011, and 6.6 percent during the last three months of 2012.

"Obviously if mortgage rates were to back up a lot and if that had a big consequence for the economy, then we very well could rethink the issue about whether we want to buy more mortgages," Dudley told the Nightly Business Report.

Dudley made similar comments this week in an interview with the Associated Press.

Because the Fed has been saying it would end the program for months, the move should not take anyone by surprise, Dudley said. But the Fed would reexamine the decision, he said, "If there's a sharp turn in the road ... Nothing is on automatic pilot." ...CONTINUED

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