Fed State of Play: Reinvest Plan to Come in Sep, Start Oct/Nov

By Karen Mracek

     WASHINGTON (MNI) - The Federal Open Market Committee is ready to announce

the beginning of the end of its reinvestments at its Sept. 19-20 meeting, but a

debt ceiling crisis could push actual implementation back a month from Oct. 1 to

Nov. 1.

     The announcement next month seems to be a done deal, with minutes of the

July FOMC meeting confirming several participants were prepared to announce a

starting date for the program at that meeting, while "most" participants

"preferred to defer the decision until an upcoming meeting while accumulating

additional information on the economic outlook and developments potentially

affecting financial markets."

     The committee members were reassured, though, by the Survey of Market

Participants, which showed markets expected the "effects on bond yields and

spreads on mortgage-backed securities from the change in reinvestment policy to

be modest."

     The FOMC wants to get on with this step in its normalization plan, so it

can turn its focus to interest rates. The committee wants the fed funds rate to

be its main policy tool, and there is much more division on when to move on

rates versus when to change the reinvestment policy.

     New York Fed President William Dudley in an interview with the Associated

Press said the markets' expectation for a September announcement was not

unreasonable.

     "The plan is out there," he said. "It's been, I think, generally

well-received, and fully anticipated. People expect it to take place. In the

last FOMC statement, we said that we expected this to happen relatively soon.

So, I expect it to happen relatively soon."

     One issue that could impact the start date, which is largely expected to be

Oct. 1, is the debt ceiling. Treasury Secretary Steven Mnuchin has said Congress

needs to raise the debt ceiling by Sept. 29. That means the FOMC has four weeks

to monitor progress on developments around that decision.

     If it looks like the debt ceiling debate may come down to the wire, the

FOMC could simply move the start date back a month. It would still announce the

implementation of the plan at the September meeting but choose Nov. 1 as the

starting date instead of Oct. 1.

     It would be a very minor adjustment in the eyes of the Fed. In the minutes,

many of the participants noted the program was expected to contribute "only

modestly" to the reduction in policy accommodation, and a month's move is not

going to change that.

     And with the gradual phase-in of the caps, the difference between October

and November is small for markets as well.

     The plan to reduce reinvestments calls for gradually increasing caps, with

anything over the caps being reinvested. At first the caps will be $6 billion

per month for Treasuries and $4 billion for agency debt and mortgage-backed

securities.

     In October, this would mean the Fed would redeem $6 billion in Treasuries

and reinvest $3 billion, according to portfolio estimates by the New York Fed

which were updated last month with possible scenarios for start dates. In

November, it would redeem $6 billion and reinvest $13 billion in Treasuries.

     As for mortgage-backed securities, the Fed would redeem $4 billion in

October and reinvest $15 billion. November's maturities are similar with $4

billion to be redeemed and $16 billion reinvested, if the reinvestment plan was

implemented by then.

--MNI Washington Bureau;tel: +1 202 371-2121; email: karen.mracek@marketnews.com

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