WASHINGTON (MNI) – The following are selected excerpts from the
Federal Open Market Committee minutes published Tuesday:
The meeting opened with a short discussion regarding communicating
with the public about monetary policy deliberations and decisions.
Meeting participants supported a review of the Committees communication
guidelines with the aim of ensuring that the public is well informed
about monetary policy issues while preserving the necessary
confidentiality of policy discussions until their scheduled release.
Governor Yellen agreed to chair a subcommittee to conduct such a review.
Developments in Financial Markets and the Federal Reserves Balance
Sheet
The Manager of the System Open Market Account (SOMA) reported on
developments in domestic and foreign financial markets since the
Committee met on September 21, 2010. He also reported on System open
market operations, including the continuing reinvestment into
longer-term Treasury securities of principal payments received on the
SOMAs holdings of agency debt and agency-guaranteed mortgage-backed
securities (MBS). The Open Market Desk at the Federal Reserve Bank of
New York purchased a total of about $65 billion of Treasury securities
since the Committee decided, on August 10, to begin reinvesting such
principal payments. Purchases were concentrated in nominal Treasury
securities with maturities of 2 to 10 years, though some shorter-term
and some longer-term securities were purchased along with some Treasury
inflation- protected securities (TIPS). Over the intermeeting period,
the Desk also conducted a number of smallvalue tri-party reverse
repurchase operations with the primary dealers and with money market
mutual funds that have been accepted as counterparties for such
operations; these transactions, which the Desk conducted to ensure
continuing operational and systems readiness, used Treasury securities,
agency debt, and agencyguaranteed MBS as collateral. In addition, the
Federal Reserve conducted another small-value auction of term deposits
to ensure the continued operational readiness of the term deposit
facility and to increase the familiarity of eligible depository
institutions with the auction procedures. There were no open market
operations in foreign currencies for the Systems account over the
intermeeting period. By unanimous vote, the Committee ratified the
Desks transactions over the intermeeting period.
The Manager described the tentative plans the Desk had prepared for
implementing a possible Committee decision to expand further the
Systems holdings of longer-term Treasury securities. Purchases would
continue to be concentrated in nominal Treasury securities with
remaining maturities between 2 and 10 years, with some purchases of
shorter- and longer-term securities and of TIPS; with this maturity
distribution, newly purchased securities would be expected to have an
average duration of 5 to 6 years, essentially the same as the average
duration of the Systems existing holdings of Treasury securities. The
Desk planned to publish additional information about its transactions to
increase the transparency of, and encourage wider participation in,
future purchase operations. The Desk judged that if it continued
reinvesting principal payments from the Federal Reserve Systems
holdings of agency debt and agency MBS in longer-term Treasury
securities, then it could purchase additional longer-term Treasury
securities at a pace of about $75 billion per month while avoiding
disruptions in market functioning. The Manager indicated that
implementing a sizable increase in the Systems holdings of Treasury
securities most effectively likely would entail a temporary relaxation
of the 35 percent per-issue limit on SOMA holdings under which the Desk
had been operating; whether, and to what extent, the Systems holdings
of some issues would exceed 35 percent would depend on the specific
securities that dealers choose to offer at future auctions. Finally, the
Manager summarized the implications for the Federal Reserves balance
sheet and income statement of alternative decisions that the Committee
might make about the size and maturity distribution of the SOMAs
securities holdings. Participants discussed the Desks tentative
operational plans; they also discussed the potential effects of an
expansion of the Systems holdings of longer-term securities on fi-
nancial markets and institutions and on the economy, and the channels
through which those effects could occur.
—
Commercial real estate markets remained strained.
Commercial mortgage debt in the third quarter was estimated to have
declined at a rate similar to the drop in the second quarter, and the
delinquency rate for securitized commercial mortgages continued to climb
in September. However, some signals offered modest encouragement. In
particular, vacancy rates for commercial buildings stabilized in the
third quarter, and the pipeline of new commercial mortgage-backed
securities picked up a bit from very low levels. Residential mortgage
refinancing activity moved up in late September and early October, from
an already high level, as the average interest rate on fixed-rate
mortgages fell further over the intermeeting period. In contrast, the
level of applications for mortgages to purchase homes remained anemic.
Total consumer credit contracted in August at a pace roughly in line
with the declines posted earlier in the year. Issuance of consumer
asset-backed securities was solid in September. Consumer credit quality
generally continued to improve, though delinquency rates remained
elevated. Bank credit edged up in September and October, as brisk growth
in banks holdings of securities more than offset a further decline in
total loans. Commercial and industrial (C&I) loans turned down in
September after having increased slightly over the two previous months.
A moderate net fraction of banks reported, in their responses to the
October Senior Loan Officer Opinion Survey on Bank Lending Practices,
that they had eased standards on C&I loans and narrowed spreads of C&I
loan rates over their cost of funds; demand for such loans reportedly
declined, on net, over the preceding three months. Commercial real
estate loans, home equity loans, and consumer loans contracted. However,
closed-end residential mortgage loans on banks books increased modestly
for the second month in a row. Over September and October, M2 expanded
at an average annual rate that was noticeably above its pace earlier in
the year. The growth rate of liquid deposits moved up, while small time
deposits and retail money market mutual funds continued to contract. The
compositional shift likely reflected the relatively attractive yields on
liquid deposits. Currency growth strengthened, with indicators
suggesting strong demand from abroad.
—
The dollar declined about 3 percent against a broad array of
other currencies during the intermeeting period, depreciating even more
against the euro and the yen. In addition, Chinese authorities allowed
the renminbi to appreciate slightly against the dollar. Market
commentary highlighted the possibility that major central banks would
further ease monetary policy, and the Bank of Japan expanded its asset
purchase program and reduced its policy target rate to a range of 0 to
10 basis points. Benchmark 10-year sovereign yields generally declined
in the major advanced foreign economies, but the overnight rate in the
euro area increased as the European Central Bank continued to allow the
amount of liquidity provided to the banking system to decline. Spreads
relative to German bunds on the 10- year sovereign bonds of most
peripheral euro-area countries either declined or were little changed
over the period, but Irish sovereign spreads moved higher on concerns
over the fiscal burdens associated with losses in the Irish banking
sector. Major equity indexes in the euro area and in the United Kingdom
increased moderately, whereas the Nikkei index declined. Several
emerging market central banks tightened monetary policy, including the
Peoples Bank of China. Against the backdrop of interest rate declines
in many of the advanced economies, as well as heavy capital flows toward
emerging market countries, many emerging market currencies strengthened,
reportedly prompting further official intervention in foreign exchange
markets.
-more- (1 of 3)
** Market News International Washington Bureau: 202-371-2121 **
[TOPICS: M$U$$$,MMUFE$,MGU$$$,MFU$$$]
