Benefits of Agency MBS Purchase

The purpose of the agency MBS purchase program is to assist the mortgage and housing markets while also encouraging improved financial market conditions. When the Fed began these purchases in January 2009, the US and worldwide equities markets were trading at multiyear lows amid a severe credit crisis, and there was widespread worry that the world economy was on the verge of collapse. The goal was to lower long-term interest rates. When one entity purchases a large number of bonds in the market, the price of the bonds rises. Bond prices are inversely proportional to their yield/interest rate. When a result, as the price rises, the interest rate falls. Lower interest rates boost the economy by making borrowing more affordable. In the end, the MBS purchase program proved to be crucial in providing price support and calming the nerves of many market players. The S&P 500 had gained considerably and global equity markets had been in full rally mode for nearly a year by the time the Fed concluded the purchase program in March 2010, potentially exceeding the Fed’s most optimistic forecasts.