On Wednesday along with its usual statement the FOMC released a document which details its exit strategy and plan for hiking rates. One point that the document highlighted is that the FOMC does not plan regular sales of the MBS which it has accumulated in the SOMA since early 2009. Once the FOMC begins hiking rates it will cease reinvestment of principal and that is how it will run down its MBS footings.
Federal Reserve President Lacker objects to that policy and advocates regular sales of mortgages. Lacker believes that the mortgage purchases were a form of credit allocation which were outside of the Fed’s province and which are properly the function of fiscal policy.
Lacker Says He Opposes Fed Plan to Hold Mortgage-Backed Assets
Federal Reserve Bank of Richmond President Jeffrey Lacker said he couldn’t fully support the central bank’s revised exit strategy released this week because he opposes a measure to hold mortgage-backed securities.
“I believe this approach unnecessarily prolongs our interference in the allocation of credit,” he said in a statement released on the Richmond Fed’s website today. Lacker will be a voting member next year on the Federal Open Market Committee.
“The Fed’s statutory mandate of price stability and maximum employment would be best served, I believe, by a well-articulated plan to actively reduce our holdings of MBS through sales at a steady, predictable pace,” he said.
The Fed’s new exit plan, released Sept. 17, said all but one official agreed on the approach, without identifying the dissenter. Lacker’s statement today suggests he was the lone participant disagreeing with the strategy.
The U.S. central bank’s balance sheet has swelled to $4.45 trillion on purchases of Treasuries, mortgage-backed securities and federal housing agency debt. The goal is to lower long-term interest rates and support housing markets.
The new plan to withdraw stimulus was a break with the June 2011 exit principles and recent Fed tradition. The Fed now “does not anticipate selling agency mortgage-backed securities as part of the normalization process,” according to the exit plan released this week.
Interfering in credit markets “is unnecessary to the conduct of monetary policy, the central bank’s primary responsibility, and involves distributional choices that should be made through the democratic process and carried out by fiscal authorities,” Lacker said in his statement today.
The 2011 strategy was explicitly aimed at shrinking the balance sheet through sales of housing agency debt and mortgage-backed securities to minimize “the allocation of credit across sectors of the economy.”
That was in keeping with a joint policy statement issued by the U.S. Treasury and the Fed in March 2009 also said the central bank should avoid credit allocation.
Lacker has opposed credit allocation, worried that such precedents would lead to constant requests for aid. During the financial crisis, lawmakers asked the Fed to support the auto industry.
“The ability of a central bank to intervene in credit markets using the asset side of its balance sheet creates an inevitable tension,” he said in a November 2011 speech in Washington. “The resulting political entanglements, as we have seen, create risks for the independence of monetary policy.”
The Fed holds $1.7 trillion of mortgage-backed securities and $40 billion in federal agency debt.
“The Fed’s MBS holdings may put downward pressure on mortgage rates, compared to holding an equivalent amount of Treasury securities, but if so, then other borrowers would likely face higher interest rates,” Lacker said today. “While this would favor home mortgage borrowers, it tilts the playing field against other borrowing by consumers.”