Tuesday, August 10, 2010

Fed to Reinvest Mortgage Backed Securities Cash Flow

The FOMC is out with their statement, and as expected, the Fed has announced that it will reinvest the principle payments it receives from MBS. This is unlikely to have an appreciable impact, if any at all, on the economy, unless perfect storm conditions kick in.
Further, the Fed intends to buy Treasury securities with the cash it receives from MBS payments, but depending on how the Fed actually purchases the Treasury securities, as Bob English has pointed out, it may have zero impact if the Treasury securities are bought directly from the Treasury and the money is funneled to Fannie and Freddie to make payments to the Fed. If the Fed buys in the open market, there will be impact, but not significant.

Bernanke has to be classified as somewhere between jawboning stage and the all out nuclear option (lowering the rate on excess reserves). He's nervous but not in panic--that will come.

Here's the FOMC statement in its entirety:

For immediate release

Information received since the Federal Open Market Committee met in June indicates that the pace of recovery in output and employment has slowed in recent months. Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising; however, investment in nonresidential structures continues to be weak and employers remain reluctant to add to payrolls. Housing starts remain at a depressed level. Bank lending has continued to contract. Nonetheless, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be more modest in the near term than had been anticipated.

Measures of underlying inflation have trended lower in recent quarters and, with substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time.

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

To help support the economic recovery in a context of price stability, the Committee will keep constant the Federal Reserve's holdings of securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities.1 The Committee will continue to roll over the Federal Reserve's holdings of Treasury securities as they mature.

The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Donald L. Kohn; Sandra Pianalto; Eric S. Rosengren; Daniel K. Tarullo; and Kevin M. Warsh.
Voting against the policy was Thomas M. Hoenig, who judges that the economy is recovering modestly, as projected. Accordingly, he believed that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted and limits the Committee's ability to adjust policy when needed. In addition, given economic and financial conditions, Mr. Hoenig did not believe that keeping constant the size of the Federal Reserve's holdings of longer-term securities at their current level was required to support a return to the Committee's policy objectives.


  1. "recieves" --> "receives"

  2. Purchases will be from the PD's by the NY Fed's open market desk. I still believe this will help paper over significant losses that Fannie and Freddie have shoveled to the Fed and will require drawing on the Treas. line of credit, which the Fed will now subsidize. No one loses, right?


    "Purchases will be conducted with the Federal Reserve’s primary dealers through a series of competitive auctions via the Desk’s FedTrade system. The exact list of securities eligible for purchase will be made available at the beginning of each purchase operation. The results of each operation will be published on the Federal Reserve Bank of New York’s website shortly after each purchase operation has concluded."

  3. Will this announcement send the price of Gold down ?

  4. @Bob English

    It's hard to determine too much from the Fed buying via PD's. That's pretty much how they always buy.

  5. @Anonymous

    It should be neutral for gold to long term bullish (If enough money is eventualy printed.)