The Federal Reserve announced that it will sell some of its mortgage-backed securities valued at $1.1 trillion, although neither a timeframe nor a detailed plan have been determined, according to a May 7 report in The Wall Street Journal.
Because the sell-off could push down the value of the securities, as well as increase mortgage borrowing costs, many Fed officials are in favor of holding onto the assets until after the central bank starts to increase short-term interest rates and tighten credit. Many have voiced concerns that markets would see the Fed’s move of selling the assets as a means to tighten credit before the economy is prepared to bear it.
However, some officials would rather see the assets unloaded sooner, arguing that maintaining such a larger portfolio could increase speculation that the central bank may allow inflation to grow.
One approach to the sale of the assets that is gaining support is to reduce the Fed's mortgage holdings substantially within four or five years after credit tightening starts. This approach would allow the central bank to increase sales later as well as provide it with the option of tapering down the sale if the economy responded poorly.
"I would start slow and then move based on the economy," James Bullard, president of the St. Louis Fed, told the Journal. "I would want to ensure markets that you would do it slowly over a longer period of time."
Starting the selling process could take as long as a year or more and some officials have raised concerns that the debt crisis in Greece could have a spillover effect in U.S. markets, the Journal added.
http://www.appraisalinstitute.org/ano/current.aspx?volume=11&numbr=9/10#10411