Fed's markets chief applauds early QE3 successes

Tue Nov 27, 2012 7:22pm EST

* Effects of asset buys influencing primary mortgage rates

* Potter's first public comments since taking over markets

By Jonathan Spicer

NEW YORK, Nov 27 (Reuters) - The official overseeing the U.S. Federal Reserve's massive asset purchases said on Tuesday they have had some recent success reducing longer-term rates, leaving the door open for investors to take advantage.

In his first public comments since taking the reins of the central bank's open market operations in June, Simon Potter defended the Fed's decision in September to launch a third and controversial round of quantitative easing, dubbed QE3.

Under QE3, Potter's branch of the Federal Reserve Bank of New York buys some $40 billion in mortgage-backed securities (MBS) in an effort to reduce longer-term borrowing costs, push investors into riskier assets, and to boost a sector of the economy that has held back the overall U.S. recovery from recession.

In September "we saw a large effect" in the secondary MBS market, "which has now fed through to the primary rate," said Potter. "And there has also been spillovers into other rates (including) real Treasuries and definitely into other forms of fixed income."

"That makes the program look successful in terms of reducing those rates. The next step is for people to act and make decisions based on those lower rates," Potter, the head of the New York Fed's markets group, said in response to questions from students and faculty at NYU's Stern School of Business.

Many, including some of the Fed's 19 policymakers, have criticized QE3 as excessive and providing little support when yields - especially in Treasuries - were already near record lows. There is also the worry that the Fed's massive balance sheet, now at nearly $2.9 trillion, paves the way for future inflation.

While some have bemoaned the very incremental reduction in actual mortgage rates in the primary market, others have said every bit of support from the Fed helps in spurring economic growth and lowering the high 7.9 percent unemployment rate.

Potter, who replaced Brian Sack at the helm of the Fed's open market operations, acknowledged that the desired size of the effect of such large-scale asset buys is "relatively controversial."

But he argued that the Fed "would get the most efficient reaction from buying mortgage-backed securities," given that a parallel easing program, dubbed Operation Twist, targets Treasuries. Under Twist, which expires at year-end, the Fed sells some $45 billion in shorter-term bonds and buys the same amount in longer-term bonds.

Central bank policymakers are expected to decide to extend both MBS and Treasury purchases into 2013 when they meet Dec. 11-12. Potter usually attends these policy-setting meetings in Washington with New York Fed President William Dudley.

"We know a lot more about the MBS market now than we did prior to the (financial) crisis," Potter added.

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