Wednesday, July 21, 2010

Bernanke's Prepared Testimony

Federal Reserve Chairman Ben Bernanke's Semiannual Monetary Policy Report to the Congress before the Senate Committee on Banking, Housing, and Urban Affairs, delivered earlier today, is here.

Most everything in the prepared marks are not new. However, this paragraph caught my eye:
One approach is for the Committee to adjust its reinvestment policy--that is, its policy for handling repayments of principal on the securities--to gradually normalize the portfolio over time. Currently, repayments of principal from agency debt and MBS are not being reinvested, allowing the holdings of those securities to run off as the repayments are received. By contrast, the proceeds from maturing Treasury securities are being reinvested in new issues of Treasury securities with similar maturities. At some point, the Committee may want to shift its reinvestment of the proceeds from maturing Treasury securities to shorter-term issues, so as to gradually reduce the average maturity of our Treasury holdings toward pre-crisis levels, while leaving the aggregate value of those holdings unchanged. At this juncture, however, no decision to change reinvestment policy has been made.
It appears that the Fed is just thinking about it, rather than acting, but at some point, Bernanke is telling us he wants to shorten the maturity on the Treasury securities the Fed buys. If they actually follow through on this, it's one more pressure point that will eventually push rates higher, specifically, in this case, the securities in the range that the Fed will allow to mature without re-purchasing new maturities in that time horizon.Stay tuned.

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