By Steven K. Beckner

(MNI) – The Federal Reserve concluded its large-scale asset
purchases Wednesday as scheduled, and it is very unlikely to resume
them.

But it is just as unlikely that the Fed will be selling any of its
holdings of agency debt and agency-guaranteed mortgage backed securities
anytime soon.

Although settlement on some securities will not take place for
awhile, the Fed wrapped up $1.25 trillion in MBS purchases and $175
billion of agency debt buying at the end of March as promised.

As MNI reported early this year and as Fed officials subsequently
confirmed, the Fed was prepared to reenter the MBS market after March if
the cessation of MBS purchases caused an unduly adverse reaction.

But that was not something the Fed was ever eager to do.

And even though mortgage interest rates have risen modestly lately
along with other long-term interest rates, partially in anticipation of
the conclusion of the MBS buying program, it is known that the Fed
remains strongly disinclined to buy more MBS, barring unexpectedly
negative market developments.

For the Federal Open Market Committee to decide to reopen the asset
purchase program and buy more MBS, there would have to be fairly
dramatic increases in mortgage rates and/or a sharp widening of spreads
between Treasury yields on securities and mortgage rates, MNI
understands.

The Fed’s reluctance to buy more MBS does not equate to an
eagerness to sell MBS, however.

While a minority of FOMC members would like to see the Fed sell
assets and shrink its balance sheet fairly early on in the monetary
tightening process, most see MBS sales only coming much later after the
Fed has used various reserve draining techniques in preparation for
hikes in short-term interest rates and after a job-creating expansion
has progressed further.

Even then it is envisioned that the Fed would proceed slowly and
gradually with any asset sales to avoid disrupting financial markets.

And the tightening process probably won’t begin in any fashion for
some time to come.

** Market News International **

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