Slow Ride: Fed Talks MBS Options

Though most participants in last month's joint meeting between the Federal Open Market Committee (FOMC) and the Federal Reserve System's board of governors agreed that the Fed should sell its mortgage-backed securities (MBS), opinions varied with respect to when the sales should begin and how quickly the MBS should be sold.

According to minutes from the meeting, held April 27-28 in Washington, D.C., most participants agreed the sales of agency debt and MBS should be implemented ‘in accordance with a framework communicated in advance and be conducted at a gradual pace that potentially could be adjusted in response to changes in economic and financial conditions.’

Some attendees expressed a desire to defer sales until after the first increase in the FOMC's target for short-term interest rates. Others favored a strategy whereby the FOMC would outline a general schedule for future asset sales. Under this approach, the start date for the asset sales would not necessarily be linked to the increase in the FOMC's interest-rate target, the minutes show.

A minority of attendees preferred to begin sales ‘relatively soon.’

‘Earlier sales would normalize the size and composition of the balance sheet sooner and would unwind at least part of the unconventional policy stimulus put in place during the crisis before conventional policy firming got under way,’ the minutes say.

In regard to the pace of asset sales, most meeting participants voiced support for a gradual sell-off that would take about five years to complete.

A shorter, three-year timetable was endorsed by other participants.

‘In their view, a relatively brisk pace of sales would reduce the chance that the elevated size of the Federal Reserve's balance sheet and the associated high level of reserve balances could raise inflation expectations and inflation beyond levels consistent with price stability or could generate excessive growth of credit when the economy and banking system recover more fully,’ the FOMC minutes say.

SOURCE: Federal Reserve


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