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Richmond Fed’s Lacker Evaluates Effect of MBS Purchases

Hours before the Federal Reserve Bank of New York unveiled details on its weekly agency mortgage-backed securities (MBS) purchases, the Richmond Fed president Jeffrey Lacker spoke about potentially winding down the purchase program. The most recent Federal Open Market Committee meeting concluded with an initiative to slow the Fed’s purchases of up to $300bn US Treasury securities and complete them by the end of October. But the Fed’s initiative to buy up to $1.25trn of MBS from mortgage giants Freddie Mac (FRE), Fannie Mae (FNM) and Ginnie Mae will continue as planned. It may prove unnecessary and even non-beneficial, Lacker said in a speech Thursday. Agency MBS purchases provide liquidity that reduces the amount banks must borrow from the Fed to satisfy elevated demand for reserve account balances. “Should those purchases continue at their current pace, there will come a point at which the banking system will no longer need to borrow to obtain the desired level of reserve balances,” Lacker said. “At that point further asset purchases would then push the supply of reserve balances beyond demand, and would necessitate a downward adjustment in other yields to induce banks to voluntarily hold large balances.” The effect would essentially mean more monetary stimulus than the asset purchases themselves provide, he noted. So far, the purchases have displaced borrowing from the Fed by banks. “With the economy leveling out and beginning to grow again later this year, and with bank reserve demand ebbing as financial conditions improve, I will be evaluating carefully whether we need or want the additional stimulus that purchasing the full amount authorized under our agency mortgage-backed securities purchase program would provide,” Lacker said. The New York Fed late Thursday said it bought $25.8bn of agency MBS in the week ending August 26. The weekly transactions were concentrated among MBS with 30-year maturations and 5.5 coupons. The New York Fed also sold $425m of 30-year 5 coupons. Write to Diana Golobay.

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