Friday, July 16, 2010

FOMC Agrees on Fed Asset Sales, Unsure of Timing

The minutes of the June 22 and 23 Federal Open Market Committee (Committee) show a continuation of the discussion from previous meetings regarding asset sales and the shrinking of the Federal Reserve’s balance sheets.

The Committee members were in agreement that sales of mortgage backed securities (MBS) should be undertaken, at some point, to speed the return to a Treasury-securities-only portfolio. Any decision to sell assets should be well communicated in advance of any transactions and should be done at a gradual pace. Committee members agreed that the Federal Reserve needed to maintain flexibility and the sale of assets should be adjusted based on financial and economic developments.

However, the minutes show that there was some disagreement on the timing.

A few Committee members wanted to begin such sales fairly soon. They noted that the market was demanding safe, longer-term assets. So, a modest sale of MBS was unlikely to “put much, if any, upward pressure on long-term interest rates or be disruptive to the functioning of financial markets.”

But most participants viewed the selling of MBS as potentially tightening financial conditions and believed the modest weakening in the economic outlook warranted deferring asset sales. They preferred that asset sales were postponed until the economic recovery was well established and short-term interest rates were beginning to rise.

A few participants recommended that the Federal Reserve sell MBS and use the proceeds to buy Treasury securities of comparable maturity. This “would hasten the move toward a Treasury-securities-only portfolio without tightening financial conditions.”

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