CIAO DATE: 05/2013
March 2013
The U.S. Federal Reserve's monetary stimulus efforts have an undesirable side effect that needs to be managed with great care: the Fed has amassed a huge stock of mortgage-backed securities (MBS) that it will eventually want to liquidate without damaging the nascent housing recovery. What is needed to accomplish this is a relatively simple but innovative scheme whereby the Fed can, in one transaction, transform its MBS holdings into an equivalent amount of U.S. Treasury securities. Such an arrangement would allow the Fed to use conventional means of raising interest rates when inflation threatens without the worrisome economic and political consequences of selling mortgage-backed securities.
Resource link: Exiting from Monetary Stimulus: A Better Plan for the Fed [PDF]