Fed’s Dudley: potential for more action on mortgages

NEW YORK ― 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, a top Federal Reserve official said on Monday.

William Dudley, president of the New York Federal Reserve Bank, also warned about the risks of “spillover” effects from Europe’s debt crisis.

Dudley’s comments marked the second time in a week that a Fed policy maker highlighted the possibility that the U.S. central bank could do more to support the housing market.

Housing has been a persistent headwind to the U.S. economic 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 policy makers,” Dudley said in a speech at Fordham University’s Gabelli School of Business in New York.

“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,” Dudley said.

“Depending on how the world evolves, we potentially could move to do more in that direction.”

Dudley, who as head of the New York Fed has a permanent voting seat on the Fed’s policy-setting committee, said the U.S. central bank will continue to do everything within 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 policy makers to do more to spur economic 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 and has since bought $2.3 trillion in bonds to spur a recovery.

U.S. central bank officials regularly cite housing as having hamstrung the recovery from the worst recession in decades. But the purchase of mortgage securities was a controversial part of the first round of quantitative easing in 2009, and some officials criticize it for propping up a specific sector of the economy.

Speaking in the New York City borough of the Bronx, Dudley called the housing market “a serious impediment” to a stronger recovery, which this year has been plagued by “quite disappointing” growth in gross domestic product.Yet 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 purchases.”The Fed is doing — and will continue to do — everything within its power to promote jobs and price stability,” said Dudley.