Simon Potter, the Federal Reserve Bank of New York’s markets group chief, said the central bank’s purchases of government and housing debt under its third round of quantitative easing aren’t causing market disruptions.
“The purchases have gone smoothly so far, and market liquidity seems to be holding up well,” Potter said in the text of remarks delivered at the district bank’s annual meeting with primary dealers today in New York.
The policy-setting Federal Open Market Committee in January affirmed its plans to keep buying $40 billion in mortgage bonds and $45 billion in Treasuries each month. Several participants said the central bank should be ready to alter the pace of the purchases as it monitors the state of the economy and weighs the program’s benefits and costs, minutes of that meeting showed.
“So far, there seems to be little evidence that the current pace of purchases is straining the market’s ability to deliver securities to us,” Potter said.
The Fed’s Treasury purchases comprise about 25 percent of monthly gross issuance of coupon securities, he said. The Fed has been buying about half of monthly gross issuance for mortgage securities since its latest bond-purchase program began last year, including reinvestments, he said.
The central bank’s ability to purchase mortgage bonds is “somewhat more difficult to gauge, given the uncertainty around future mortgage origination,” Potter said. “As the pace of MBS issuance evolves, the desk will continue to watch” market functioning indicators.
Potter said the “predominant” impact of the Fed’s latest quantitative-easing measure on interest rates is probably from expectations for the program’s total size and duration, even though policy makers have left both open-ended.
“One feature of the current program is that market participants’ expectations of the total amount and composition of securities that the desk will purchase -- and thus, the amount of monetary policy accommodation -- will evolve over time, along with incoming information about the economy, as well as considerations about policy efficacy and costs,” he said.
The Fed’s 21 primary dealers trade government securities with the central bank and are obligated to bid in Treasury auctions.