There are a number of possible ways for the Federal Reserve to unwind its mortgage-backed securities purchases, but reverse repurchase sales would be outcome, according to a panelits at the Mortgage Bankers Association's National Secondary Market Conference Wednesday.
Speaking at a panel on quantitative easing, Deustche Bank managing director Steven Abrahams reminded attendees that the Fed "may not have to sell," its holdings. He cited Fed minutes and statements made earlier this year by Fed chair Ben Bernanke during his semi-annual Humphrey Hawkins testimony and by Fed Gov. Elizabeth Duke.
But ultimately, "We may not be able to escape the impact of a Fed exit," he said.
Seth Carpenter, senior associate director, monetary policy affairs, Federal Reserve System, and another panelist, agreed that statements by Bernanke and Duke are "important" to consider in analyzing how purchases might be unwound. In a report published last year, Carpenter and other Fed officials looked at how unwinding purchases might affect the Fed’s balance sheet and payments to the Treasury.
In a reverse repo, the Fed would let the market “borrow” the bonds in return for cash, selling them using an arrangement where there is simultaneously a “sale” of the MBS and an agreement to buy them back later at a set price.