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Tidbits from the FOMC minutes…

September 2, 2009

Just going through the FOMC minutes now and there were a couple of interesting bits worth flagging:

Meeting participants again discussed the merits of including agency MBS backed by adjustable-rate mortgages (ARMs) in the Committee’s MBS purchase program:
Some thought it would be useful to include agency ARM MBS, noting that doing so could reduce
the unusually large spreads between ARM rates and yields on similar-duration Treasury securities—spreads that were far larger than the comparable spreads on fixed-rate mortgages; others saw little potential benefit, given the small stock and limited issuance of ARM MBS, and were hesitant to involve the Federal Reserve in another market segment. The Committee made no decision on purchasing ARM MBS at this meeting.

It just seems odd that they would be discussing expanding the MBS purchasing program at all when the debate seems to be hinging on whether it’s time to think about pulling back on it. See my posting on it here. Also, not sure they want to be in the business of stimulating riskier segments of the mortgage market.

Participants also discussed the merits of progressively reducing the pace at which the Federal Reserve buys Treasury securities, agency debt, and agency MBS prior to the end of the asset purchase programs. They generally were of the view that gradually slowing the pace of the Committee’s purchases of $300 billion of Treasury securities and extending their completion to the end of October could help promote a smooth transition in markets. A number of participants noted that a similar tapering of agency debt and MBS purchases could be helpful in the future as those programs approach completion. The Committee made no decisions on tapering those purchases at this meeting.

That seems to indicate some are leaning toward keeping the dollar amount, $1.25 trillion for agency MBS and $200 billion agency debt, steady but stretching it out into 2010. The Treasury purchases were originally slated to stop in September.

It also put forth three strategies to mop up all the liquidity it’s pumped into the system.

These measures include executing reverse repurchase agreements on a large scale, potentially
with counterparties other than the primary dealers; implementing a term deposit facility that would be available to depository institutions in order to reduce the supply of excess reserves; and taking steps to tighten the link between the interest rate paid on reserve balances held at the Federal Reserve Banks and the federal funds rate. Several participants noted the need
to continue refining the Committee’s strategy for an eventual withdrawal of policy accommodation.

On a side note, it’s interesting that the Fed is open to going outside the primary dealer community for reverse repos. Yesterday, the NY Fed also named four non-primary dealers to act as intermediaries for the TALF program.

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