Still trying to shore up the mortgage market, participants in the meeting last month of the Federal Reserve Board's policymaking open market committee were divided over whether to buy mortgage-backed securities tied to adjustable-rate mortgages.
"Some thought it would be useful to include agency ARM MBS, noting that doing so could reduce the unusually large spreads between ARM rates and yields on similar-duration Treasury securities — spreads that were far larger than the comparable spreads on fixed-rate mortgages," according to minutes of the Fed's August meeting released on Wednesday. "Others saw little potential benefit, given the small stock and limited issuance of ARM MBS, and were hesitant to involve the Federal Reserve in another market segment."
The Fed ultimately made no decision on the question but has committed itself to buy $1.25 trillion of agency mortgage-backed securities by yearend.
Meanwhile, the central bank continued to deliberate over how to withdraw all the liquidity the Fed has pushed into markets during the financial crisis. The Fed sees at least three options: conducting repurchase agreements, possibly with firms beyond the primary dealers the central bank usually works with; tightening the relationship between the interest the Fed pays on reserves held by financial institutions and the federal funds rate; and creating a separate "term deposit" account in which institutions could park money outside of the federal funds market.
Several policymakers at the meeting said the Fed needs to "continue refining the … strategy for an eventual withdrawal" of liquidity.