NEW YORK (MNI) – The following is the second and final section of
the remarks of New York Federal Reserve Bank Executive Vice President
Brian Sack Monday evening prepared for the annual meeting with primary
dealers:

Our purchases are focused on newly-issued securities in the
To-Be-Announced (TBA) market, given that these are relatively more
liquid and more closely tied to the primary mortgage rate.8 In
particular, we have set the distribution of our purchases over agencies,
coupons, and terms to be roughly proportional to an estimate of new
market origination. However, we make some exceptions based on the
objective of the program and concerns about market functioning, which to
date have led us to reduce the allocation to securities issued by Ginnie
Mae and to 15-year MBS relative to what would have been called for under
a proportional approach.

Lastly, you may have noticed that the FOMC directive to the Desk
provided the authority to conduct dollar roll transactions to facilitate
the settlement of our MBS purchases. We will take an approach of
engaging in dollar roll transactions if the pricing of the roll moves to
levels indicating significant scarcity of the securities on which we are
expecting delivery. This is a prudent approach for addressing market
functioning concerns while maintaining the policy objective of the
program.

Conclusion

In conclusion, let me say that all of us have a role in the
operational success of the Federal Reserve’s balance sheet programs. On
our end, we try to design programs that meet the FOMC’s objectives while
not being detrimental to the functioning of financial markets. On your
end, we rely on your ongoing and active participation in these
operations, both for your own accounts and on behalf of other market
participants, under the terms that we have specified. To date, I think
that both sides have lived up to their responsibilities, resulting in
the effective implementation of these programs. Going forward, we hope
to continue this track record, regardless of the direction that policy
takes.

Footnotes:

1 My comments do not necessarily reflect the views of the Federal
Open Market Committee (FOMC) or any other members of the Federal Reserve
System.

2 The FOMC statement can be found at

http://www.federalreserve.gov/newsevents/press/monetary/20110921a.htm,

and the Desk statement can be found at

http://www.newyorkfed.org/markets/opolicy/operating_policy_110921.html.

3 In a speech in July 2010, I noted that the asset purchase
programs
had removed duration risk from the market not only through the size of
the SOMA portfolio, but also through its composition (see
http://www.newyorkfed.org/newsevents/speeches/2011/sac110720.html). The
MEP is designed to operate exclusively through the composition of the
balance sheet.

4 See

http://libertystreeteconomics.newyorkfed.org/2011/10/sizing-up-the-feds-maturity-extension-program.html.

5 In this regard, asset purchase programs contain a degree of
freedom that policymakers do not have under a MEP. Under an asset
purchase program, policymakers can choose the optimal range of
maturities to be purchased and can scale the program up as needed to
achieve the desired effects.

6 The algorithm for determining which bids to accept in our sales
operations depends only on a comparison to market prices. This approach
does not involve an additional assessment of relative value across
securities, in contrast to the algorithm for purchasing securities. One
reason for this difference is that we are selling the vast majority of
our securities holdings, and thus there would be little benefit to the
relative value assessment if most of the differences in value are
persistent.

7 Chairman Bernanke’s Jackson Hole speech in August 2010 (see

http://www.federalreserve.gov/newsevents/speech/bernanke20100827a.htm)

and the minutes from the August 2010 FOMC meeting (see

http://www.federalreserve.gov/monetarypolicy/files/fomcminutes20100810.pdf

PDF) indicated that reinvesting in MBS rather than Treasury securities
might become desirable if market conditions were to change. In a speech
from October 2010 (see
http://www.newyorkfed.org/newsevents/speeches/2010/sac101004.html), I
noted, “A significant widening of MBS spreads to Treasuries … could
affect policymakers’ decisions about which assets to purchase.”

8 To be sure, the spread between the primary mortgage rate and the
secondary rate on MBS is very wide, reflecting a variety of factors.
However, those factors should not reduce the sensitivity of the primary
rate to the secondary rate over time.

(2 of 2)

** Market News International New York Newsroom: 212-669-5430 **

[TOPICS: M$U$$$,MMUFE$,MGU$$$,MFU$$$]