7  The Desk also has the ability to execute agency MBS trades by other means. 8  Of course, this maturity distribution could change as part of the Committee’s ongoing assessment of the efficacy and costs of asset purchases. 9  For more information on the TBA market, see Vickery and Wright (2013). BIS central bankers’ speeches  3  MBS backed by new loans into the TBA market because of the market’s liquidity and because the TBA market is a forward market, which allows originators to hedge the risk associated with locking in loan rates with new borrowers.10 The Desk concentrates its TBA purchases in “production coupons,” since the yields and prices for production coupons are directly related to the primary mortgage rate. In general, the Desk purchases MBS in the TBA market across different agencies, maturities, and coupons in amounts that are roughly proportional to anticipated issuance of those securities. Issuance of new TBA securities varies over time, based on the level of refinancing and home purchase activity. Moreover, because the coupon at which new MBS are originated depends on the overall level of interest rates, the possibility of future fluctuations in the primary mortgage rate makes it difficult to determine well in advance which coupons will be issued. As a result, the Desk is not able to provide the same detailed guidance about the composition of its MBS purchases as is possible with Treasury purchases.
As a result of these decisions, the Federal Reserve is currently adding $ billion in longer-term securities each month to its holdings, in addition to reinvesting principal payments from its holdings of agency MBS and agency debt securities into agency MBS.1 Under this program, we have bought about $ billion in Treasury securities since January and about $ billion in agency MBS since mid-September, bringing the total par value of the Federal Reserve’s SOMA (System Open Market Account) portfolio to over $ trillion.2 In my comments today, I will describe the key differences and similarities between the recent policy action and previous programs and discuss how the Desk implements these asset purchases. As always, the views expressed here are my own and do not necessarily reflect those of the Federal Reserve Bank of New York or the Federal Reserve System.3 Outcome-based purchases The FOMC’s current asset purchase program has some key differences from earlier policy initiatives. When announcing previous programs to change the size or composition of its balance sheet, the FOMC communicated an expected total size of each program and an anticipated date by when it would be completed. Under the current asset purchase program, the FOMC has announced only the monthly pace and composition of purchases and noted that purchases will continue until there is a substantial improvement in the outlook for the labor market in the context of price stability.