WASHINGTON (MNI) - The following is the section of the Federal Open Market Committee minutes of the Nov. 3-4 meeting concerning the Federal Reserve's balance sheet and exit strategies, published Tuesday:

Developments in Financial Markets and the Federal Reserve's Balance Sheet The Manager of the System Open Market Account reported on recent developments in domestic and foreign financial markets. The Manager also reported on System open market operations in Treasury securities, agency debt, and agency mortgage-backed securities (MBS) since the Committee's September 22-23 meeting. By unanimous vote, the Committee ratified those transactions. There were no open market operations in foreign currencies for the System's account during the intermeeting period. Since the Committee met in September, the Federal Reserve's total assets were about unchanged, on balance, at approximately $2.2 trillion, as the increase in the System's holdings of securities roughly matched a further decline in usage of the System's credit and liquidity facilities. The Manager noted that, as of October 30, $300 billion in Treasury securities had been purchased, as directed by the Committee. Overall, the Treasury market had recovered substantially from the strains during the financial crisis, and the Manager reported that the completion of the Federal Reserves purchase program did not appear to have led to any significant upward pressure on Treasury yields or to any notable deterioration in Treasury market functioning. There was little evidence, to date, of a buildup in year-end funding pressures, although demand for Treasury bills with maturities extending just beyond the year-end seemed to be elevated. The Manager noted that the recent path of purchases of agency debt was consistent with buying a cumulative amount of $175 billion by the end of the first quarter of 2010. The staff briefed the Committee on recent developments regarding various Federal Reserve liquidity and credit facilities, including the Term Auction Facility (TAF), the primary credit program, the Term Asset- Backed Securities Loan Facility (TALF), and the swap lines with foreign central banks. Usage of these facilities had been declining in recent months as financial market conditions continued to improve. On September 24, the Board of Governors announced a gradual reduction in amounts to be auctioned under the TAF through January and indicated that auctions of credit with maturities longer than 28 days would be phased out. The staff reviewed the changes that had been made since the onset of the crisis to the terms of the primary credit program, including loan maturities and interest rates. The staff noted that reducing the maximum maturity of loans available under the primary credit program from 90 days to 28 days would represent another step toward normalization of the Federal Reserves policy-implementation framework and would align the maximum maturities of the primary credit program with those under the TAF, but no action on this matter was taken by the Board at this meeting. Regarding the TALF, the staff indicated that auto and credit card asset-backed security issuance was increasingly being funded by non-TALF sources; however, commercial MBS remained more dependent on TALF financing.

The staff presented another update on the continuing development of several tools that could help support a smooth withdrawal of policy accommodation at the appropriate time. These measures include executing reverse repurchase agreements (RPs) on a large scale, potentially with counterparties other than the primary dealers; implementing a term deposit facility, available to depository institutions, to reduce the supply of reserve balances; and taking steps to tighten the link between the interest rate paid on reserve balances held at the Federal Reserve Banks and the federal funds rate. The staff had made considerable further progress on these tools. Participants expressed confidence that the Committee would be in a position to remove policy accommodation when appropriate by raising the rate of interest paid on excess reserves and by employing reserve- management tools such as reverse RPs, term deposits, and, if desirable, asset sales. Completing the operational work necessary to establish reverse RPs and term deposits as tools that can drain large volumes of reserves was viewed as an important near-term objective. Participants anticipated that the Federal Reserve would conduct tests of these tools, but they stressed that such testing would not imply that these tools would be employed for policy purposes any time soon. Participants expressed a range of views about how the Committee might use its various tools in combination to foster most effectively its dual objectives of maximum employment and price stability. As part of the Committee's strategy for eventual exit from the period of extraordinary policy accommodation, several participants thought that asset sales could be a useful tool to reduce the size of the Federal Reserve's balance sheet and lower the level of reserve balances, either prior to or concurrently with increasing the policy rate. In their view, such sales would help reinforce the effectiveness of paying interest on excess reserves as an instrument for firming policy at the appropriate time and would help quicken the restoration of a balance sheet composition in which Treasury securities were the predominant asset. Other participants had reservations about asset salesespecially in advance of a decision to raise policy interest ratesand noted that such sales might elicit sharp increases in longer-term interest rates that could undermine attainment of the Committee's goals. Furthermore, they believed that other reserve management tools such as reverse RPs and term deposits would likely be sufficient to implement an appropriate exit strategy and that assets could be allowed to run off over time, reflecting prepayments and the maturation of issues. Participants agreed to continue to evaluate various potential policy-implementation tools and the possible combinations and sequences in which they might be used. They also agreed that it would be important to develop communication approaches for clearly explaining to the public the use of these tools and the Committee's exit strategy more broadly.

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