Fed President Puts Timeline on Rates Policy. Raises Doubts on Mortgage Purchase Program

Since Ben Bernanke first hinted at a possible extension a few more Fed officials have suggested extending mortgage-backed securities purchases beyond the March deadline. Many market watchers believe this will prevent potential setbacks in housing markets. Dudley however says it would "seem prudent" to pull back on Fed MBS purchases. Basically, by calling attention to the size of the Fed's balance sheet Dudley is telling us that if they Fed continues to hold the hand of the market, that it will be harder and harder for the Fed to exit the mortgage market. He did not totally close the door to an extension though, if mortgage rates rise to the point where loan supply is much less than forecast (which is already expected to be very low relative to this year), the Fed would need to step in and buy more mortgages.