Fed curbs agency purchases in "calculated" move

By Al Yoon - Analysis

NEW YORK (Reuters) - The Federal Reserve's planned cutback in agency debt purchases may be a move to reassure financial markets it won't make sudden shifts as it unwinds its massive support, analysts said.

The Fed on Wednesday said it would pare its total buying of unsecured debt of federal housing agencies to about $175 billion from a previous commitment of up to $200 billion, citing limited amounts of debt sold by Fannie Mae, Freddie Mac and the Federal Home Loan banks.

Fed purchases of the debt soaked up the bulk of mortgage-related issuance this year, aiding affordability and recovery in the housing market. Investors are concerned the value of holdings could fall should the stimulus disappear.

Despite being billed as a technical move by the Fed, some economists saw the reduction as a low-risk reminder by the central bank to investors it will wean the markets off its support in a gradual way.

"This is all part of the tweaking process as we approach the end of accommodation," New York-based analysts at RBC Capital Markets, led by Ira Jersey, said in a client note. "In our view, this agency decision had the lowest risk of "disturbing the market".

SLOW RETREAT

How the Fed exits its "quantitative easing" policy has been among the most hotly debated issues for investors because prices in agency, Treasury and mortgage bond markets have all come to rely on federal purchases.

Withdrawing $25 billion of purchases may look like pocket change, compared with the Fed's massive emergency support that has more than doubled its balance sheet to $2 trillion.