Fed Considers How to Sell $1.1 Trillion of Mortgage-Backed Securities « The Washington Independent
The Wall Street Journal’s Jon Hilsenrath has a good piece on the problems facing the Federal Reserve as it tries to slim down its balance sheet, now swollen with $1.1 trillion in mortgage-backed securities and totaling more than $2.3 trillion. The story notes:
“„Fed staff in the coming week will present models to forecast how different approaches to reducing the portfolio might play in markets. But some officials worry that they have little experience selling assets and can’t rely exclusively on models to predict how markets will react. That — and a worry about disturbing the vulnerable housing market — has top officials inclined to proceed gradually and cautiously, at a predictable pace. …
“„In April, Narayana Kocherlakota, president of the Minneapolis Federal Reserve Bank, called for monthly sales of $15 billion to $25 billion to eliminate the Fed’s mortgage holdings within five years…. Some Fed policy makers — among them Charles Plosser of Philadelphia, Jeffrey Lacker of Richmond and Kevin Warsh at the Fed board — are sympathetic.
The Fed — which started buying up Fannie Mae and Freddie Mac securities to perform “quantitative easing,” a way to pump money into the economy when the interest rate is near zero, and stopped on March 30 — now owns a quarter of U.S. mortgage debt. Right now, that debt is actually making the Fed money, generating interest payments worth $20.4 billion last year. But the Fed unloading such massive amounts of these securities will necessarily push their prices down (meaning the Fed could lose money on them) and mortgage rates up (slowing any housing recovery).
But such is the position the Fed is in, unraveling its extraordinary crisis programs even as the recovery is fragile. The Treasury faces a similar problem with its 1.5 billion shares of Citigroup, more than a quarter of the company’s stock.
