Fed Ponders Pace of Selling $1.2 Trillion in MBS Assets

Federal ReserveUnloading $1.2 trillion from its balance sheet is no easy matter for Federal Reserve officials, with such factors as inflation, interest rates and a long, uneasy economic recovery at stake.
At their April 27-28 Federal Open Market Committee meeting, Fed officials agreed that sales of its mortgage-backed securities would be implemented within a framework communicated in advance and at a gradual pace “that potentially could be adjusted in response to changes in economic and financial conditions.”
But the pace and term of the sales was a subject of debate as FOMC members started looking ahead to a more grounded and sustainable recovery.
Fed officials raised estimates for economic growth for 2010 as the “deterioration in the labor market was likely coming to an end.”  Its outlook is now for GDP growth of 3.2 percent-3.7 percent, up from January’s estimate of 2.8 percent-3.5 percent. But less concern over inflation was tempered by a still worrisome housing market.
The FOMC kept its “extended period” pledge for maintaining its key target for short-term interest rates at the historically low 0-.25 percent.
And a majority preferred beginning asset sales “some time after the first increase” in the federal funds rate.
“Such an approach would postpone any asset sales until the economic recovery was well established and would maintain short-term interest rates as the Committee’s key monetary policy tool,” according to the notes from the April FOMC meeting.
Most on the committee preferred that the $1.2 trillion in mortgage-backed securities be sold at a gradual pace that would complete the sales “about five years after they began.”
The Fed’s MBS purchase program ran from Jan. 5, 2009 through March 31, 2010. Its goal was to bolster mortgage and housing markets, and prop up financial sectors at the onset of the worst economic crisis since the Great Depression.
A couple of FOMC participants wanted a faster pace of sales over about three years. They felt that such a pace would not strain financial markets and would reduce the chance of an “elevated balance sheet” raising inflation expectations. A faster pace could also prevent “excessive growth of credit when the economy and banking system recover more fully,” the meeting notes said.
No decisions on the FOMC’s long-term strategy for asset sales and redemptions were made at this meeting.
“On balance, the economic outlook had changed little since the March meeting,” the Fed notes said. “Even though the recovery appeared to be continuing and was expected to strengthen gradually over time, most members projected that economic slack would continue to be quite elevated for some time.”

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