Federal Reserve Bank of New York Executive Vice President Brian Sack is dropping hints that the Fed will soon begin to purchase mortgage-backed securities as part of quantitative easing and larger economic stimulus. “In terms of the benefits, balance-sheet expansion appears to push financial conditions in the right direction,” he said in remarks at 2010 CFA Institute Fixed Income Management Conference, Newport Beach, Calif., “in that it puts downward pressure on longer-term real interest rates and makes broader financial conditions more accommodative.” Wall Street investment banks are taking Sack’s remarks as part of several indications the quantitative easing will begin again in November. Bank of America Merrill Lynch (BAC) and JPMorgan (JPM) recently released research notes discussing the impact this will have on the secondary market. Sack adds that such federal policy is not a perfect solution. In the past, the Federal Open Markets Committee made the previous QE decisions in 2008-2009 based on available dollar volumes. This time around, the Fed may wish to incorporate more flexibility in its approach, whereas the original asset purchase programs specified the amount and distribution of purchases well in advance. While a new round of economic support would help foster recovery, Sack mentioned some of the risks. “It is reasonable to assume that the effects of balance sheet expansion would diminish at some point, especially if yields were to move to extremely low levels.” Download the full text of Sacks’ speech here. Write to Jacob Gaffney. The author holds no relevant investments.

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