As financial conditions improve, the Federal Reserve will start using agency MBS in reverse repurchase agreements to soak up excess reserves in the banking system and eventually start to sell MBS at a "gradual pace," according to Fed chairman Ben Bernanke.

"Any such sales would be at a gradual pace, would be clearly communicated to market participants, and would entail appropriate consideration of economic conditions," the Fed chief says in testimony prepared for a House Financial Services Committee hearing. Wednesday's hearing was canceled because of the snowstorm that has paralyzed Washington.

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