–Most Want to Sell Agencies, MBS After 1st FFR Hike
–Most Want to Postpone Asset Sales Til Recovery Well Established

By Steven K. Beckner

“A majority preferred beginning asset sales some time after the
first increase in the (FOMC) target for short-term interest rates,” the
minutes say. “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.”

The minutes report that “other participants” — a minority —
“favored a strategy in which the Committee would soon announce a general
schedule for future asset sales, with a date for the initiation of sales
that would not necessarily be linked to the increase in the Committee’s
interest rate target.”

“A few preferred to begin sales relatively soon,” say the minutes.
“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.”

Views also differed on how predictable the schedule of asset sales
should be.

“Some participants saw advantages to varying the FOMC’s holdings of
longer-term assets systematically in response to economic and financial
developments,” say the minutes. “However, others thought that a
preannounced pace of sales that was unlikely to vary much would provide
a high degree of certainty about sales, helping to limit disruptions in
financial markets.”

The minutes go on to report that “the views of participants also
differed to some extent regarding the appropriate pace of asset sales.”

But again, as MNI has been reporting, “Most preferred that the
agency debt and MBS held in the portfolio be sold at a gradual pace that
would complete the sales about five years after they began.”

The minutes add that “one possibility would be for the pace to be
relatively slow initially but to increase over time, allowing markets to
adjust gradually.”

Only “a couple of participants thought faster sales, conducted over
about three years, would be appropriate and felt that such a pace would
not put undue strain on financial markets.”

In that minority 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.”

As for what to do with the $300 billion in longer term Treasury
securities the New York Fed acquired as part of “quantitative easing,”
FOMC members discussed pros and cons.

“Participants saw both advantages and disadvantages to not rolling
over Treasury securities as they mature,” say the minutes. “On the one
hand, redeeming Treasury securities would contribute to a more
expeditious normalization of the size of the balance sheet and the
quantity of reserves. On the other hand, such redemptions could put
upward pressure on interest rates and would tend to work against the
objective of returning the SOMA to an all-Treasuries composition.”

After all the discussion, the minutes say, “no decisions about the
Committee’s longer-run strategy for asset sales and redemptions were
made at this meeting.”

“For the time being, participants agreed that the Desk should
continue the interim approach of allowing all maturing agency debt and
all prepayments of agency MBS to be redeemed without replacement while
rolling over all maturing Treasury securities. Participants agreed to
give further consideration to their longer run strategy at a later
date.”

As was known, the minutes say the New York Fed’s open market desk
“was preparing to conduct small-scale reverse repurchase operations to
ensure its ability to use agency MBS collateral.”

The desk “also continued to work toward expansion of the set of
counterparties for reverse repurchase operations.” And the staff noted
that the Board of Governors had approved changes to Regulation D to
permit the establishment of a term deposit facility.

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** Market News International **

[TOPICS: M$$CR$,M$U$$$,MMUFE$,MGU$$$,MFU$$$,M$$BR$]