FOMC Minutes Suggest Decision on MBS Buy Slowing Plan This Fall

August Federal Open Market Committee minutes show members discussed slowing the Fed's agency mortgage-backed securities and debt purchases before their planned end this year, making it likely there will be a decision on this issue this fall. As the initial August FOMC meeting statement revealed, the Fed has made plans to end its Treasury purchases in October and the minutes showed a similar plan for the agency MBS and debt buys also was discussed. Some analysts think the FOMC might take action on the issue as early as this month. "Minutes of the August FOMC meeting suggest that the Fed could continue at its current pace, but taper off the purchases as we approach the program completion for a smooth transition. The September FOMC meeting would be an optimal time to make the announcement, in our view," Credit Suisse researchers said in a Sept. 3 report. Art Frank, director and head of mortgage-backed securities research at Deutsche Bank Securities, New York, said he believes slowing the purchases before stopping them could help the market avoid a shock that could cause disruptive spread widening. He said the minutes and comments from Fed officials showing they have discussed this are a good sign to that end. The minutes also showed FOMC members talked about possibly including agency MBS backed by adjustable-rate mortgages in the purchase program to address unusually large spreads between ARM rates and comparable Treasury yields. But divided opinions on the topic made the move seem unlikely. The plan to end Fed Treasury purchases in October may have some implications for MBS and potentially could boost mortgage rates. But these are less of a concern for the MBS market than the end of the MBS purchases themselves, Mr. Frank said.