Philadelphia Federal Reserve President Requests MBS Sell Off
Charles Plosser who is the President of the Philadelphia Federal Reserve made a statement three weeks ago suggesting that “The Federal Reserve should consider selling off some of its portfolio of mortgage backed securities even before raising official interest rates in order to make monetary policy more effective.”
Mr. Plosser’s statement was made during an interview at the end of March of this year. The statement was in support of his belief that a reduction in the balance sheet was necessary to make changes to its main policy tools, federal funds and discount rates more effective.
Sitting Chairman of The Federal Reserve; Ben Bernanke seemed to agree with Mr. Plosser’s position. Mr. Bernanke stated in front of a congressional panel “that the central bank will at some point gradually unload some of its $1.25 trillion portfolio of mortgage securities”. Mr. Plosser’s statements held a final point that he believed that the gradual selling off of these mortgage backed securities would not cause any further damage to an already volatile market.
In February the fed raised the rate that it charges for overnight loans from 0.50% to 0.75%. Many investors took the increase as the first step by the fed to raise short term loans in the future. Investors agree that this increase will bring the feds closer to their target rate sooner than expected.
Housing market watchdogs agree that the fed’s decision to sell off mortgage backed securities should not cause the market to decline into a free fall. The fact is that the fed has already begun to sell off some of its holdings at a slow pace. Private investors who are keenly aware of the possible returns and the risk involved have been anxiously awaiting the opportunity to scoop up government issued securities. Interest rates should continue to remain stable throughout the selloff of a large portion of the Federal Reserve’s holdings.
Mr. Plosser’s statement was made during an interview at the end of March of this year. The statement was in support of his belief that a reduction in the balance sheet was necessary to make changes to its main policy tools, federal funds and discount rates more effective.
Sitting Chairman of The Federal Reserve; Ben Bernanke seemed to agree with Mr. Plosser’s position. Mr. Bernanke stated in front of a congressional panel “that the central bank will at some point gradually unload some of its $1.25 trillion portfolio of mortgage securities”. Mr. Plosser’s statements held a final point that he believed that the gradual selling off of these mortgage backed securities would not cause any further damage to an already volatile market.
In February the fed raised the rate that it charges for overnight loans from 0.50% to 0.75%. Many investors took the increase as the first step by the fed to raise short term loans in the future. Investors agree that this increase will bring the feds closer to their target rate sooner than expected.
Housing market watchdogs agree that the fed’s decision to sell off mortgage backed securities should not cause the market to decline into a free fall. The fact is that the fed has already begun to sell off some of its holdings at a slow pace. Private investors who are keenly aware of the possible returns and the risk involved have been anxiously awaiting the opportunity to scoop up government issued securities. Interest rates should continue to remain stable throughout the selloff of a large portion of the Federal Reserve’s holdings.
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