The Federal Reserve released its 2009 annual report Monday and indicated it would not begin selling off any of the assets it bought in to boost the economy in 2009 until it has started to raise interest rates. This includes more than $1.1 trillion in mortgage-backed securities.
The Fed will not sell the assets until the economy is clearly in recovery mode. This bodes well for people in the home buying market, as mortgage rates are likely to remain at appealing low levels.
“The Federal Reserve currently does not anticipate that it will sell any of its securities holdings in the near term, at least until after policy tightening has gotten under way and the economy is clearly in sustainable recovery,” the Fed reported on its website today. “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”.
Following the cut of interest rates to near-zero levels at the end of 2008, the Fed started buying mortgage-related debt to stimulate the slumping economy by providing liquidity to the markets in order to encourage lending. The Fed increased the amount of credit it made available to the economy from roughly $900 billion to about $2.3 trillion.
As of last week, the Fed had $1.12 trillion in the holdings of mortgage-backed securities and $167.6 billion of agency debt securities. Selling these holdings would tighten both short-term and long-term interest rates.
“Asset sales by the Federal reserve would serve to raise short-term interest rates and tighten monetary policy by reducing the level of reserve balances; in addition, such sales could put upward pressure on longer-term interest rates by expanding the supply of longer-term assets available to investors,” the Fed stated in its report.
The Fed expects the recovery from the current recession to take a prolonged amount of time – as evidenced by the unemployment numbers that continue to rise and sagging home values – so low interest rates will likely remain in place for an “extended period”.
Loading ...
RSS feed for comments on this post.
Leave a comment