WASHINGTON (MNI) – The following is an excerpt of the text of the
statement released Wednesday by the Federal Open Market Committee after
its two-day monetary policy meeting June 22 – June 23, discussing the
sale MBS securties:

As background for the Committee’s continuing consideration of its
portfolio management policies, the Manager gave a presentation on
alternative strategies for reinvesting the proceeds from maturing
Treasury securities. Under current practice, the Desk reinvests the
proceeds of maturing Treasury coupon securities in new Treasury
securities that are issued on the date the older securities mature,
allocating the investments across the new securities in proportion to
the issuance amounts. The Manager presented two alternatives to the
status quo. First, the Committee could consider halting all reinvestment
of the proceeds of maturing securities.

Such a strategy would shrink the size of the Federal Reserve’s
balance sheet and reduce the quantity of reserve balances in the banking
system gradually over time. Second, the Committee could reinvest the
proceeds of maturing securities only in new issues of Treasury
securities with relatively short maturities bills only, or bills as
well as coupon issues with terms of three years or less. This strategy
would maintain thesize of the Federal Reserve’s balance sheet but would
reduce somewhat the average maturity of the portfolio and increase its
liquidity. One participant favored halting all reinvestment, and many
saw benefits to eventually adopting an approach of reinvesting in bills
and shorter-term coupon issues to shift the maturity composition of the
portfolio toward the structure that had prevailed prior to the financial
crisis. However, the Committee made no change to its reinvestment policy
at this meeting.

Continuing a discussion from previous meetings, participants again
addressed issues regarding asset sales. Participants continued to agree
that gradual sales of MBS should be undertaken, at some point, to speed
the return to a Treasury-securities-only portfolio. A few participants
supported beginning such sales fairly soon; they noted that, given the
evident demand in the market for safe, longer-term assets, modest sales
of MBS might not put much, if any, upward pressure on longterm interest
rates or be disruptive to the functioning of financial markets. However,
many participants still saw asset sales as potentially tightening
financial conditions to some extent.

Most participants continued to judge it appropriate to defer asset
sales for some time; several noted the modest weakening in the economic
outlook since the Committee’s last meeting as an additional reason to do
so. A majority of participants continued to anticipate that asset sales
would start after the Committee had begun to firm policy by increasing
short-term interest rates; such an approach would postpone asset sales
until the economic recovery was well established and maintain short-term
interest rates as the Committee’s key monetary policy tool. A few
participants suggested selling MBS and using the proceeds to purchase
Treasury securities of comparable duration, arguing that doing so would
hasten the move toward a Treasury-securities-only portfolio without
tightening financial conditions.

Participants agreed that it would be important to maintain
flexibility regarding the appropriate timing and pace of asset sales,
given the uncertainties associated with the unprecedented size and
composition of the Federal Reserve’s balance sheet and its effects on
financial conditions. Overall, participants emphasized that any decision
to engage in asset sales would need to be communicated well in advance
of the initiation of such transactions, and that sales should be
conducted at a gradual pace and potentially be adjusted in response to
developments in economic and financial conditions.

** Market News International Washington Bureau: 202-371-2121 **

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