October 24, 2011 / 10:51 PM / 6 years ago

WRAPUP 5-Fed could target US housing to help economy -Dudley

* Fed will continue to do everything within power -Dudley
    * Depending on conditions, could do more on housing
    * QE3 one possible option, Dudley says
    * Dudley: Inflation rate should fall late this year, next
    * Fisher: Would not support more mortgage-backed buying

    By Jonathan Spicer
    NEW YORK, Oct 24 (Reuters) - The weak housing sector
continues to pose a strong headwind to the U.S. economic
recovery, and the Federal Reserve could potentially do more to
drive down mortgage rates to support the sector, an influential
Federal Reserve official said on Monday.
    William Dudley, president of the New York Federal Reserve
Bank, said another round of quantitative easing, or QE3, is one
possible option the U.S. central bank has to boost the slow
recovery. "I don't think the Fed has run out of bullets," he
    Dudley also warned about "spillover" effects from Europe's
debt crisis, which he predicted would be solved. But his
comments on housing in particular could raise the stakes in the
debate over what, if anything, the U.S. central bank should do
    It was the third time in a week that a Fed policymaker
highlighted the possibility that the central bank could do more
to support the housing market, a persistent drag on the
recovery. A glut of foreclosed homes on the market and tight
credit have contributed to a sector virtually stuck in the mud
and unable to gain traction.
    "Breaking this vicious cycle is one of the most pressing
issues facing policymakers," Dudley said in a speech at Fordham
University's Gabelli School of Business.
    "Clearly we've indicated our interest in supporting the
housing market in keeping mortgage rate spreads, and spreads
between mortgage rates and Treasury yields, from getting too
elevated," he said. "Depending on how the world evolves, we
potentially could move to do more in that direction."
    The government on Monday, in a move to help homeowners
whose homes are worth less than they owe, eased the terms of a
refinancing program that helps so-called underwater borrowers
who have been on time with payments but are unable to
refinance.The overhaul, however, would help only a fraction of the 11
million underwater borrowers.
    Dudley, who as head of the New York Fed has a permanent
voting seat on the Fed's policy-setting committee, said the
central bank will continue to do everything in its power to
help the economic recovery.
    Dudley's comments come on the heels of remarks by Fed
Governor Daniel Tarullo last week that there was "ample room"
for policymakers to do more to spur growth and that more
mortgage-related securities purchases should be on the table.
    Faced with the worst recession in decades, the Fed in late
2008 cut rates to near zero. It followed with the purchase of
$2.3 trillion in debt in two consecutive rounds of
extraordinary measures known as quantitative easing -- more
familiarly dubbed QE1 and QE2 -- to spur a recovery.
    The purchase of mortgage securities was a controversial
part of QE1 in 2009; some officials criticized it for propping
up a specific sector of the economy.
    Dudley, who gave back-to-back speeches in the New York City
borough of the Bronx, called the housing market "a serious
impediment" to a stronger recovery, which this year has been
plagued by "quite disappointing" growth in gross domestic
    The rebound has been weak and is now threatened by Europe's
debt crisis, casting doubt on the central bank's strategy and
effectiveness but also raising some expectations for more asset
    "The Fed is doing -- and will continue to do -- everything
within its power to promote jobs and price stability," said
Dudley. Later, addressing the Bronx Chamber of Commerce, he
said "quantitative easing round three" was a possible option.
    "Without robust growth, the economy is more vulnerable to
negative shocks, which unfortunately seem to keep coming,"
Dudley said. "It is like riding a bicycle -- at a slow speed,
the bicycle wobbles and the risk of falling rises."
    Another Fed regional president, Richard Fisher of the
Dallas Fed, said he would be reluctant to endorse more aid to
the housing sector.
    "There are other initiatives that the fiscal and other
authorities can take that would possibly pick housing up off
the floor, but I think it is going to be a very long-term
process," said Fisher, who spoke in Toronto. "I think we have
to be careful not to get into fiscal initiatives at the central
    Europe, meanwhile, threatens to drag the world into another
recession as policymakers there wrangle over a possible Greek
default and its impact on the European banking system.
    Dudley, citing the effect on stock markets and on bank
lending, said: "To date, these effects have been much more
acute in Europe than in the United States, but there are
spillovers to our nation, and we need to monitor them
    However, Dudley said he sees the inflation rate, which has
been higher than the Fed's preferred level of 2 percent,
falling, barring more energy price jumps. "I believe that
underlying fundamentals will help to subdue inflation over the
next few quarters," he said.
    Fisher, whose dissenting votes on recent Fed easing put him
on the opposite end of the policy spectrum from Dudley, agreed.
"Inflation is not the problem in the United States right now,"
he said, adding that high unemployment is the biggest problem
facing the U.S. economy.
    But Fisher did not advocate more action by the Fed. He said
adding any more heft to the Fed's $2.8 trillion balance sheet
would be of "questionable efficacy."
    Last month, the Fed announced a plan, known as Operation
Twist, to replace $400 billion of short-term securities in its
portfolio with longer-term debt in order to lower longer-term
rates and stimulate the economy.
    Brian Sack, head of the New York Fed's markets group, told
primary dealers in New York that the effect of Operation Twist
is about equal in size to that of the Fed's second round of
asset purchases.
    To date, he said, mortgage-backed securities purchases have
gone smoothly with market liquidity "quite good."

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