the debt and mortgage - backed securities issued by fannie mae and freddie mac do not. by comparison, marketable treasury securities outstanding outside the government total $ 2. 8 trillion. however, holding debt issued by fannie mae or freddie mac in the fed's portfolio, to the exclusion of other private assets, would, in my view, reinforce the market perception of the special status of federal actually, the fed rarely sells assets outright from its portfolio. most open market operations aimed at withdrawing reserves are done with temporary operations. agency debt. this would increase the subsidy that already exists in this market, potentially further distorting the allocation of credit and resources. any decision to move in this direction, therefore, might be best linked to a broader decision to change the federal reserve act to allow the federal reserve to hold private debt in its portfolio. in that case, federal agency debt could be treated symmetrically with high - grade commercial paper and corporate bonds. similarly, mortgage - backed securities insured by fannie mae or freddie mac should not be treated differently from other highly - rated private debt. of course, holding only federal agency debt, mortgage - backed securities issued or guaranteed by the federal agencies, and other similarly highly - grade private debt would still distort credit allocation by favoring high - grade over other private debt - - but it would dilute the federal agency advantage. federal agency debt and mortgage - backed securities issued or guaranteed by the federal agencies also could be held as part of a wider range of private debt. the fed holds foreign sovereign debt today in order to earn interest on its foreign exchange holdings which it acquired in the course of interventions over the years. the question here is whether the fed should also carry out open market operations by buying and selling such debt. the effect of doing so would be essentially the same as a foreign exchange intervention. this raises a host of questions about the suitability of such operations. it first raises a question of whether such operations would have to be coordinated with the treasury, given that both the treasury and the federal reserve are authorized to intervene in foreign exchange markets and routinely coordinate their interventions. second, buying and selling foreign sovereign debt would have a direct effect on the countries whose assets we were buying or selling and could interfere with their domestic policies. though these considerations weigh against holding foreign sovereign debt in the permanent portfolio, such debt could be used as collateral for dollar - denominated repurchase agreements with dealers. such transactions would not change the currency composition

. first, the fed could replace treasury securities in its portfolio with other assets and carry out outright purchases and sales from the new portfolio as it does from the current one. second, the fed could widen the collateral acceptable for repurchase agreements and make greater use of repurchase agreements relative to outright purchases and sales. because the fed already transacts about half its temporary operations with collateral other than treasury securities, this option would involve moving further along a path we are already on. third, the fed could make greater use of loans through the discount window. i would like to explore each of these directions. 1. replace treasury securities with other assets in the fed's portfolio. the federal reserve could replace its current holdings of treasury securities either with other assets that it is already authorized to hold or a wider range of other assets, including some that could only be purchased if the fed were granted new legislative authority. this direction, however, is the boldest one and could raise concerns about neutrality, credit risk, and political pressure. however, in principle, a rules - based and index - focused approach could reduce the potential for effects on resource allocation, control risk exposure through diversification, and lessen the opportunity for political pressure. the federal reserve, by statute, has authority to hold ( 1 ) treasury securities, ( 2 ) federal agency debt and agency mortgage - backed securities, ( 3 ) bankers acceptances, ( 4 ) foreign sovereign debt, ( 5 ) certain municipal securities, ( 6 ) foreign exchange, and ( 7 ) gold. currently the fomc authorizes soma to make outright purchases only of treasury securities and federal agency debt. agency debt, however, makes up only a tiny fraction of the portfolio today and there have been no outright purchases since 1981. the gold and foreign sovereign debt in the portfolio reflect an earlier historic role for gold and stem from interventions in exchange markets rather than from open market operations to affect the reserve base. the most obvious candidates for holding the fed's permanent portfolio are from those assets allowed by statute but not currently being purchased by soma. this group includes federal agency debt, mortgage - backed securities issued or guaranteed by the agencies, and foreign sovereign debt. about $ 2 trillion is in federal agency debt outstanding, and $ 2. 6 trillion is in mortgage backed securities issued by fannie mae, freddie mac, and ginnie mae. mortgage - backed securities issued by ginnie mae carry the full faith and credit of the federal government, whereas