Brian Sack, the Federal Reserve Bank of New York’s markets group chief, said the central bank’s program of reinvesting proceeds from maturing housing debt into mortgage-backed securities isn’t disrupting markets.
“The purchases have gone smoothly and market liquidity seems to be quite good,” Sack said today in the text of remarks given at the New York Fed’s annual meeting with primary dealers.
The policy-setting Federal Open Market Committee last month said it would swap $400 billion of short-term debt in its portfolio for longer-term securities in order to bring down interest rates, a strategy dubbed Operation Twist. The central bank also said it will switch to reinvesting housing debt proceeds to mortgage bonds from Treasuries.
This reinvestment change “came as a surprise to the markets, in part because the FOMC had communicated that it seeks to return to a Treasury-only portfolio over time,” Sack said.
“However, the move to a Treasury-only portfolio has always been described as a longer-run objective,” he said, whereas “near-term policy decisions” are based on “economic and financial developments that have implications for the FOMC’s ability to meet its objectives.”
Sack said that while the Fed’s operations in the Treasury market under the maturity extension program have also “gone well,” he has been surprised by the “upward pressure” on short-term Treasury yields as the central bank has sold bonds.
“This element of the program was not intended to put upward pressure on shorter-term Treasury yields,” Sack said. “Indeed, with the FOMC indicating that it anticipates that economic conditions are likely to warrant the current level of the federal funds rate through mid-2013, I would have expected the 2-year Treasury yield to remain well anchored.”
Yields on two-year Treasury notes have climbed to 0.28 percent from 0.19 percent on Sept. 21, when the Fed announced Operation Twist. Sack said the markets desk “will continue to monitor” the yields.
The 22 primary dealers are counterparties to the central bank’s transactions and underwrite the government’s debt. The New York Fed released the text of Sack’s comments after the meeting.