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Fed Update: Asset Sales Will Be Gradual

During the credit crisis, the Fed stepped in to purchase somewhere in the vicinity of $1.7 Trillion of mortgage-backed securities, agency paper, and longer-term treasury bonds. The goal of the Fed’s “quantitative easing” program was for the Fed to put a bid under the market for these debt securities so as to keep interest rates artificially low while the banking system was recovering.

However, now that the crisis has past, the question becomes: How will the Fed get rid of all those bonds? Brian Sack, executive vice president at the New York Federal Reserve said that the Fed will reduce its vast securities holdings passively and gradually and that a more aggressive approach would be counterproductive.

In prepared remarks, Sack said, "A decision to shrink the balance sheet more aggressively could be disruptive to market functioning."

The sale of bonds is part of the Fed’s “exit strategy.” However, there has been concern as to how quickly or how aggressively the Fed would act. Should the fed try to sell too much too fast, interest rates would spike; something the credit markets have been concerned about.

There was no mention as to when the Fed would begin making debt sales. And given that the purchases are just now ending, there will likely be a time lag before the bond market has to deal with this situation.

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