–Seeing ‘Beginnings of More Sustained and More Robust’ Recovery
PHILADELPHIA (MNI) – The New York Federal Reserves chief of the
Open Market Desk — and the supervisor of QE2 operations — Wednesday
night said the Fed is making “considerable progress” preparing for the
time when it will be appropriate to tighten.
Sack, speaking at the Philadelphia Fed, echoed Chairman Ben
Bernanke earlier in the day who said the expanded balance sheet is
throwing off paper profits, but even if that were to turn to losses, it
would only lower remittances to Treasury and not affect monetary policy
or the economy.
“We continue to make considerable progress increasing our capacity
to drain reserves if necessary,” he said. “At this time, more than 500
depository institutions have registered for the term deposit facility.
Those firms, in aggregate, hold nearly $600 billion of the reserve
balances that are currently in the financial system.”
Sack said the Fed has also added 58 money market funds as
counterparties for reverse repurchase agreements, in addition to the 20
primary dealers that are regular counterparties. “Those money funds
currently hold more than $1.5 trillion of assets, with a good portion of
those assets in the type of short-term repurchase agreements that we
would be offering.”
“In short,” he said, “we have already established considerable
capacity to drain reserves with these two tools, and we will continue to
advance them in productive directions.”
The FOMC, he said, could also remove policy accommodation by
halting the reinvestment of maturing assets or by selling securities
that are held in the SOMA portfolio.
Sack said the QE2 purchases thus far “do not appear to be causing
significant strains on the liquidity or functioning of the Treasury
market.”
He acknowledged “it is unusual for the market to have such a large,
persistent, and one-sided participant, and we had to worry about how it
would adjust to our presence.” The result has been, however, “that
market liquidity is decent at this time.”
Trading volumes, bid-ask spreads, or quote sizes, worsened in
December, but that pattern appears to have been driven by year-end
effects rather than our presence in the market,” he said.
“These measures have recovered since the year-end, moving back
toward the levels observed before the start of the purchases,” he said.
Answering questions after the speech, when asked if the increase in
yields reflected selling pressure that followed the realization of QE2,
he said, “I would resist the notion what we saw is just buy the rumor,
sell the facts.” He went on, “Something else very important did happen
… that we saw a real turn in the economic data.
“We are seeing the beginnings of a more sustained and more robust
economic recovery,” he said.
Asked about the prospect for any third-round quantitative easing,
Sack again echoed Bernanke’s earlier comment, that that would depend on
“whether that’s appropriate given the shift in the economic outlook.”
Back to the implementation of QE2, Sack said, “The operations to
date have gone well. Participation by the dealers
has been strong, with an average offer-to-cover ratio of about 3.5, and
the accepted offers have been allocated across a number of dealers and a
wide range of securities.”
Give the “robust” level of participation, he said the Open Market
Desk “has received competitive and appropriate prices for
the securities obtained.”
** Market News International **
[TOPICS: M$U$$$,MMUFE$,MGU$$$,MFU$$$]