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FOMC Minutes: No Asset Sales Until After First Rate Hike

Tyler Durden's picture


On the critical question of the Fed's $2.4 trillion balance sheet

Most participants expressed a preference for strategies that would eventually entail sales of agency debt and MBS in order to return the size and composition of the Federal Reserve’s balance sheet to a more normal  configuration more quickly than would be accomplished by simply letting MBS and agency securities run off. They agreed that sales of agency debt and MBS should be implemented in accordance with a framework  communicated in advance and be conducted at a gradual pace that potentially could be adjusted in response to changes in economic and financial conditions. Participants expressed a range of views on some of the details of a strategy for asset sales. Most participants favored deferring asset sales for some time. A majority preferred beginning asset sales some time after the first increase in the Federal Open Market Committee’s (FOMC) target for short-term interest rates. Such an approach would postpone any asset sales until the economic recovery was well established and would maintain short-term interest rates as the Committee’s key monetary policy tool. Other participants favored a strategy in which the Committee would soon announce a general schedule for future asset sales, with a date for the initiation of sales that would not necessarily be linked to the increase in the Committee’s interest rate target. A few preferred to begin sales relatively soon.

Earlier sales would normalize the size and composition of the balance sheet sooner and would unwind at least part of the unconventional policy stimulus put in place during the crisis before conventional policy firming got under way. Some participants saw advantages to varying the FOMC’s holdings of longer-term assets  systematically in response to economic and financial developments. However, others thought that a preannounced pace of sales that was unlikely to vary much would provide a high degree of certainty about sales, helping to limit disruptions in financial markets.

The views of participants also differed to some extent regarding the appropriate pace of asset sales. Most preferred that the agency debt and MBS held in the portfolio be sold at a gradual pace that would complete the sales about five years after they began. One possibility would be for the pace to be relatively slow initially but to increase over time, allowing markets to adjust gradually. A couple of participants thought faster sales, conducted over about three years, would be appropriate and felt that such a pace would not put undue strain on financial markets. In their view, a relatively brisk pace of sales would reduce the chance that the elevated size of the Federal Reserve’s balance sheet and the associated high level of reserve balances could raise inflation expectations and inflation beyond levels consistent with price stability or could generate excessive growth of credit when the economy and banking system recover more fully.

Participants saw both advantages and disadvantages to not rolling over Treasury securities as they mature. On the one hand, redeeming Treasury securities would contribute to a more expeditious normalization of the size of the balance sheet and the quantity of reserves. On the other hand, such redemptions could put upward pressure on interest rates and would tend to work against the objective of returning the SOMA to an all-Treasuries composition.

On the half a trillion monthly roll issue:

Participants saw both advantages and disadvantages to not rolling over Treasury securities as they mature. On the one hand, redeeming Treasury securities would contribute to a more expeditious normalization of the size of the balance sheet and the quantity of reserves. On the other hand, such redemptions could put upward pressure on interest rates and would tend to work against the objective of returning the SOMA to an all-Treasuries  composition.

In summary:

No decisions about the Committee’s longer-run strategy for asset sales and redemptions were made at this meeting. For the time being, participants agreed that the Desk should continue the interim approach of allowing all maturing agency debt and all prepayments of agency MBS to be redeemed without replacement while rolling over all maturing Treasury securities. Participants agreed to give further consideration to their longer-run strategy at a later date.

Full minutes


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Wed, 05/19/2010 - 14:16 | 361181 hedgeless_horseman
hedgeless_horseman's picture
No asset sales until after first rake hike, except for gold:   Gold Price Change due to Weakening of US Dollar +14.40   Gold Price Change due to Predominant Selling -47.30   Gold Price: Total Change -32.90
Wed, 05/19/2010 - 14:17 | 361197 WaterWings
WaterWings's picture

Check out this weird chart on the USD Index over at :

Can anyone explain that?

Wed, 05/19/2010 - 14:23 | 361218 Debtless
Debtless's picture

a glitch in the matrix.

Wed, 05/19/2010 - 15:04 | 361359 Tarheel
Tarheel's picture

fat wait, its a dissolved hedge fund... no wait...

Wed, 05/19/2010 - 15:11 | 361378 faustian bargain
faustian bargain's picture

phantom flash crash in the currency market?

Wed, 05/19/2010 - 14:13 | 361182 kaiten
kaiten's picture

No sales?, no surprise. Who would buy that junk, anyway.

Wed, 05/19/2010 - 14:18 | 361200 Panafrican Funk...
Panafrican Funktron Robot's picture

They sound pretty confident that nothing is going to come out of the audit.

Wed, 05/19/2010 - 14:27 | 361227 macfly
macfly's picture

I'm sure that they know an audit is possible, so the paper shedders and remote disc erasers have been working overtime to make sure they seem as clean as possible. The tungsten in Fort Knox may be harder to fake, but then again it depends who they bribe to do that audit!

Wed, 05/19/2010 - 14:21 | 361211 trillion_dollar...
trillion_dollar_deficit's picture


Wed, 05/19/2010 - 14:22 | 361214 Debtless
Debtless's picture

It doesn't really matter anyway, the oil blob will kill us all before rates go anywhere..

Wed, 05/19/2010 - 14:23 | 361216 Sudden Debt
Sudden Debt's picture

Tomorrow it's option experation day! :)

It's going to be a bloodbath!!

Wed, 05/19/2010 - 15:57 | 361224 Assetman
Assetman's picture

The Fed's balance sheet may double from here before we begin to see asset sales, you know, since Europe is likely to export deflation in tsunami fashion to the rest of the world.

When one thinks about it (and I try not to), a majority of the Federal Reserve's balance sheet is in derviatives-- backed by an asset with questionable value-- and secured by the full faith and credit of propped up quasi-governmental housing agencies.

That should make us all feel nice and cozy, now shouldn't it?

Wed, 05/19/2010 - 14:31 | 361238 HarryWanger
HarryWanger's picture

And the Fed is finally telling us they're concerned about Greece having an effect on global and US economies. Also mentioned housing as a concern. This report should help take us back to the lows by the close. There was nothing but fear in it from what I read.

Wed, 05/19/2010 - 14:34 | 361250 wiskeyrunner
wiskeyrunner's picture

If Rand Paul runs for president in 2012 the Federal Reserve will crash the markets, bet on it.

Wed, 05/19/2010 - 14:37 | 361256 PeterSchump
PeterSchump's picture

Harry, stop talking your book.


And back to the topic of this post.  It makes perfect sense not to sell any of the assets until rate hikes begin.  That way the will be worth even less, and the taxpayers can get fleeced even more.

Wed, 05/19/2010 - 14:45 | 361280 HarryWanger
HarryWanger's picture

My point is, there was absolutely nothing positive in those minutes, including the sale of assets. Market is acting accordingly.

Wed, 05/19/2010 - 14:49 | 361301 tmosley
tmosley's picture

lol, people don't even read Harry's posts anymore.  FYI he seems to have turned negative.

Wed, 05/19/2010 - 14:42 | 361258 PeterSchump
PeterSchump's picture

<delete double post>

Wed, 05/19/2010 - 14:55 | 361317 LeBalance
LeBalance's picture

So Ben and the subsequent Chairmen will vow not to have haircuts until the first FED ass(et) sale?  The position now has hair regs. /lol/

Wed, 05/19/2010 - 14:59 | 361335 nevadan
nevadan's picture

Now it is official.  The Fed is going to do something sooner or later.  And that is a definite maybe.

Wed, 05/19/2010 - 15:01 | 361341 joebren
joebren's picture

they're waiting for those assets to drop to 10 cents on the $ from the current 30 cents before selling. These are smart guys.

Wed, 05/19/2010 - 15:01 | 361343 Quinvarius
Quinvarius's picture

I don't believe this for one second.  Unless, by after the first rate hike, they mean 30 years after the first rate hike.

Wed, 05/19/2010 - 15:08 | 361366 TooBearish
TooBearish's picture

Wasted ink - asset sales in a deflationary spiral where the few Ms we can monitor are down YOY what a joke?!...ZRIP forever!

Wed, 05/19/2010 - 15:18 | 361393 youngandhealthy
youngandhealthy's picture

Give me a break...why on earth should they start sell before they rise the FED fund trgt? The whole strategy is to "diversify cost transformation". If you are judge and are!

A snag is Merkel and JCT

Wed, 05/19/2010 - 15:18 | 361398 Miyagi_san
Miyagi_san's picture

100 mill in WFC warrants should help...Oh Wait, they want $6.50 

Wed, 05/19/2010 - 23:00 | 362208 Grand Supercycle
Grand Supercycle's picture


EURUSD buying support is still evident.

Daily chart is now extremely oversold, will post a chart soon.

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