Fed Won't Sell Mortgage-Backed Assets Until it Raises Rates
The Federal Reserve doesn’t intend to sell any of its assets, including more than $1.1 trillion in mortgage-backed securities, until after it begins raising interest rates, the central bank said in a report to Congress.
“The Federal Reserve currently does not anticipate that it will sell any of its securities holding in the near term, at least until after policy tightening has gotten under way and the economy is clearly in a sustainable recovery,” the Fed in its annual report, which was posted on its Web site today.
Fed officials led by Chairman Ben S. Bernanke are debating when to reduce the central bank’s balance sheet and withdraw unprecedented monetary stimulus as the economy recovers. The annual report’s reference to asset sales was in line with minutes of the April Fed meeting and identical to the Fed’s February policy report to Congress.
“A majority preferred beginning asset sales some time after the first increase in the Federal Open Market Committee’s target for short-term interest rates,” according to the minutes of the Fed’s April 27-28 meeting.
“The housing market remains very fragile,” said Carl Riccadonna, senior U.S. economist at Deutsche Bank Securities Inc. in New York. “If they started selling assets they would be hurting one of the most vulnerable parts of the economy.”
Sales of existing homes rose 7.6 percent in April to a 5.77 million annual rate as buyers rushed to qualify for an expiring government tax credit, the National Association of Realtors said today in Washington. The number of homes on the market surged by the most in a decade, raising the risk that property values could soften.
Tighten Conditions
The report said asset sales would tighten financial conditions in two ways, by raising short-term interest rates as reserves were pulled out of the banking system and by putting pressure on long-term interest rates as more debt supply was added to markets.
Conditions prior to such an approach to tightening would involve “strengthening economic activity and rising inflation pressures,” the report said.
“However, economic conditions are not likely to warrant a tightening of monetary policy for an extended period,” the report said, repeating language from the April FOMC statement.
The annual report also showed that Fed bank exams declined in 2007 as the housing bubble began to deflate and subprime mortgages delinquencies began to increase.
State member bank exams hit a low of 479 in 2007 for the five-year period of 2005-2009. Similarly, on-site Fed exams of bank holding companies with total assets of more than $1 billion reached a low of 438 in 2007 over the same five-year period.
More Exams
The Fed stepped up its exams last year, with 655 inspections of the 845 state member banks it supervised, up 35 percent from 486 inspections in 2008. The Fed conducted 501 on- site exams of bank holding companies with assets of $1 billion or more in 2009, up 12.6 percent from 445 in 2008.
The percentage of delinquent subprime mortgages, or home loans to borrowers with limited or blemished credit histories, rose to 17.3 percent at the end of the fourth quarter in 2007 from 13.3 percent at the end of 2006, according to the Mortgage Bankers Association. Subprime delinquencies hit 27 percent in the first quarter of this year.
Financial institutions have reported $1.77 trillion in write-downs and credit losses worldwide since the financial crisis began, according to Bloomberg News calculations.
Agency Debt Securities
The Fed had $1.12 trillion in holdings of mortgage-backed securities and $167.6 billion of agency debt securities as of May 19, according to its weekly balance statement.
“To help reduce the size of its balance sheet and the quantity of reserves, the Federal Reserve is allowing agency debt and MBS to run off as they mature or are prepaid,” the Fed said.
The U.S. economy added 290,000 jobs in April, the fourth consecutive month of job growth. That same month, the unemployment rate unexpectedly rose to 9.9 percent. The central bank expects the economic recovery to be slower than past recoveries from deep recessions as consumers contend with elevated unemployment and a decline in home values.
To contact the reporters on this story: Joshua Zumbrun in Washington at jzumbrun@bloomberg.net Craig Torres in Washington at ctorres3@bloomberg.net.
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