* Effects of asset buys influencing primary mortgage rates
* Potter's first public comments since taking over markets
By Jonathan Spicer
NEW YORK, Nov 27 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
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
"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
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
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.