Fed in no rush to sell its mortgage assets

Minutes also show forecast on jobs was little changed

By Scott Lanman
Bloomberg News / May 20, 2010

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WASHINGTON — Federal Reserve policy makers at their most recent meeting 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, released yesterday.

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 were still trying to reach a consensus over when and how fast to reduce 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 cutting 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,’’ the Federal Open Market Committee report said.

Some policy makers said they were concerned about potential spillover to the United States 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.

“The Fed’s probably awfully happy they stayed where they were because the European situation now looks rather dicey,’’ former Fed governor Lyle Gramley said in an interview with Bloomberg Radio. Asset sales won’t occur for a while because the housing market is still “very fragile,’’ he 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.

A report yesterday from the Labor Department showed consumer prices fell 0.1 percent last month, the first decline in more than a year. The so-called core rate, which excludes food and fuel, was unchanged.

At last month’s meeting, policy makers voted 9 to 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.

At the April meeting, Fed policy makers projected the economy will expand by 3.2 percent to 3.7 percent this year.