New York: US Federal Reserve policy makers will probably buy mortgage bonds should the economy warrant more easing, with purchases of all debt totalling $500 billion (Dh1.83 trillion), according to economists in a Bloomberg News survey.

Forty-six per cent of economists say a new round of bond-buying would consist entirely of mortgage-backed securities, while 35 per cent predict it would also include Treasuries. None of the 56 economists in the survey expect the central bank would purchase only Treasuries.

Fed chairman Ben S. Bernanke said in a January 4 letter to Congress that housing is "blunting" the impact from interest rates near zero and impeding economic growth. By purchasing more mortgage bonds, Bernanke would aim to cut the cost of home loans, spurring refinancing and sales of residential properties.

"Housing has been a critical piece of prior recoveries, and the US economy is not likely to achieve sustained above trend growth without the participation of housing," said Julia Coronado, chief economist for North America at BNP Paribas in New York.

Easing debate

Economists are split on whether the Fed will buy more assets, with half saying they don't expect a third round of so-called quantitative easing at any time. Last month, 51 per cent of surveyed economists predicted the Fed won't engage in more purchases.

Coronado is among those predicting the Fed will take action. "They're going to need to support the housing markets," she said. "They're going to use that rationale to announce a mortgage purchase programme" during the second quarter.

Of the 28 analysts who foresee new buying, 17 said the purchases will begin in the second quarter of 2012.

"I would say April is more likely than June" as the date the Fed would announce bond purchases, said Dana Saporta, director of US economic research at Credit Suisse in New York. "If we have a spurt in headline inflation that would make it difficult for the Fed to come in with more accommodation. That makes us think sooner is better than later."

The central bank purchased $2.3 trillion of securities in two rounds from December 2008 until June 2011, and 10-year Treasury note yields climbed during both periods of quantitative easing. The yield climbed from 2.2 per cent on January 5, 2009, when buying began, to 3.8 per cent on March 31, 2010 when purchases ended. The interest rate on a 30-year mortgage hovered around 5 per cent during this period.

During the second round of purchases from November 12, 2010 to June 30, the yield on the 10-year Treasury note climbed from 2.79 per cent to 3.16 per cent. The central bank bought only US Treasuries during this time.

Fed governor Daniel Tarullo backed new purchases of mortgage bonds in an October 20 speech, saying the move would offer many of the same benefits as purchases of Treasuries while having "more direct effects on the housing market".

Bernanke described purchases of mortgage-backed securities as a "viable option" in a November press conference, while San Francisco Fed President John Williams said January 10 that he sees a "strong" case for new purchases of mortgage bonds.

Chicago Fed president Charles Evans told reporters that $600 billion in purchases, the same size as the second round of quantitative easing, "would be quite a good place to start". Mortgage-backed securities "could be a perfectly fine choice for those asset purchases," he said.

Mortgage-bond purchases could push down the interest rate on a 30-year mortgage to between 3 per cent and 3.25 per cent, spurring housing sales, said John Lonski, chief economist at Moody's Capital Markets Group in New York. The current rate is about 3.9 per cent, as per Freddie Mac.

Economists' predictions for the size of a third round of large-scale asset purchases by the Fed ranged from $200 billion to $1 trillion, with $500 billion as the median estimate.