Mortgage Informer

Federal Reserve policy makers last month said they were in no rush to sell $1.1 trillion of mortgage-backed securities, with a majority preferring to wait until after the central bank starts raising interest rates.

“Most participants favored deferring asset sales for some time,” while others wanted to announce a schedule or start sales soon, the Fed said in minutes of its April 27-28 meeting in Washington, released today. Officials lowered their projections for inflation, excluding food and fuel, while keeping forecasts little changed for economic growth and unemployment in 2011 and 2012.

The minutes show that Chairman Ben S. Bernanke and his colleagues are still trying to reach a consensus over when and how fast to shrink the Fed’s balance sheet as the economy recovers. The Fed aimed to lower home-loan costs and boost growth by buying mortgage securities through last March after lowering the benchmark interest rate almost to zero in December 2008.

“Even though the recovery appeared to be continuing and was expected to strengthen gradually over time, most members projected that economic slack would continue to be quite elevated for some time,” according to the Federal Open Market Committee report, which doesn’t identify the specific governors or regional-bank presidents making comments.

Ten-year Treasury note yields were near the lowest level this year as global stocks dropped on concern that Europe will further regulate financial markets. The yield on the benchmark 10-year note was little changed at 3.35 percent at 2:14 p.m. in New York.

Stocks, Dollar

The dollar weakened to $1.2379 per euro from $1.2202 late yesterday. The Standard & Poor’s 500 Index fell 0.8 percent to 1,112.02 after sliding 1.4 percent yesterday.

Some policy makers said at the meeting they were concerned about potential spillover to the U.S. from the Greek debt crisis, more than a week before European officials stepped in with an almost $1 trillion aid package and the Fed decided to restart emergency currency swaps.

“If other European countries responded by intensifying their fiscal consolidation efforts, the result would likely be slower growth in Europe and potentially a weaker global economic recovery,” the minutes said.

Officials expected inflation to remain “below rates that would be consistent in the longer run with the Federal Reserve’s dual objectives” of maximum employment and stable prices, the minutes said.

9-1 Vote

At last month’s meeting, the FOMC voted 9-1 to retain a pledge to keep the federal funds rate at a record low for an “extended period.” While the labor market is “beginning to improve,” employers are still reluctant to hire, and inflation will remain “subdued for some time,” the April 28 statement said.

Kansas City Fed President Thomas Hoenig dissented for the third straight meeting, saying the “extended period” language limited the central bank’s flexibility to raise interest rates. The minutes didn’t indicate that other voting officials might join him.

Underscoring Fed forecasts that consumer demand will be curbed by unemployment and tight credit, Wal-Mart Stores Inc., the world’s largest retailer, yesterday said a 10 percent increase in first-quarter profit was driven by growth overseas that helped make up for sales declines at U.S. stores.

Factories at Forefront

Factories have been at the forefront of the recovery from the deepest recession since the 1930s, with industrial production rising in nine of 10 months through April, according to Fed data. Deere & Co., the world’s largest farm-equipment maker, today reported second-quarter profit that topped analysts’ estimates and raised its profit and sales forecasts as demand for farm machinery increased.

Most Fed officials saw incoming economic data as “broadly in line with their earlier projections for moderate growth,” the minutes said.

At the April meeting, Fed policy makers projected the economy will expand by 3.2 percent to 3.7 percent this year the minutes said, compared with January forecasts of 2.8 percent to 3.5 percent this year. Projections of 3.4 percent to 4.5 percent in 2011 were unchanged.

The economy expanded at a 3.2 percent pace in the first quarter of the year after growing at a 5.6 percent rate in the fourth quarter of 2009, the Commerce Department said last month.

Unemployment Forecast

The unemployment rate will range from 9.1 percent to 9.5 percent in the fourth quarter of this year and from 8.1 percent to 8.5 percent in the last period of 2011, according to the median forecasts of Fed governors and regional-bank presidents.

U.S. employers added 290,000 jobs in April, the most in four years and the fourth consecutive month of gains, according to a Labor Department report on May 7. The unemployment rate rose to 9.9 percent from 9.7 percent as more Americans entered the job market.

The minutes gave a more-detailed picture than before of where Fed officials stand on asset sales.

Most policy makers preferred to sell the mortgage securities and federal-agency debt at a “gradual pace” over about five years, while a couple said selling the debt over three years would reduce the risk of higher inflation and wouldn’t “put undue strain on financial markets.”

Shrink Over Time

At the FOMC’s January meeting, officials unanimously agreed that Fed assets and banks’ excess cash would need to shrink “substantially over time” and return the central bank’s holdings to just Treasuries, minutes of that session showed. Some policy makers pushed to start selling assets in the “near future.”

Fed policy makers want to return to holding just Treasuries in part because draining funds from the banking system will reduce the risk of inflation.

One scenario might be to sell $15 billion to $25 billion of mortgage-backed securities a month, which would get the Fed out of the securities within five years if joined with consumer prepayment of mortgages, Minneapolis Fed President Narayana Kocherlakota said in an April 6 speech.

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