Fed's Sack: Higher yields due to economic optimism

The U.S. Federal Reserve's recent bond purchases have had a helpful effect on financial conditions, with the rise in long-term interest rates largely due to economic optimism, a senior Fed official said on Wednesday.

Brian Sack, who is in charge of implementing Fed policy as head of the New York Fed's markets group, said a significant rise in U.S. Treasury yields since November does not appear to reflect inflation concerns.

The upward movement in longer-term interest rates in large part reflects the greater optimism about the outlook for economic growth, Sack said.

The Fed in November launched a second round of asset buys to support a fragile economic recovery, to total $600 billion over eight months. The yield on the 10-year Treasury note, which moves inversely to its price, has risen from 2.49 percent in November to 3.65 percent at the close on Wednesday.

The rise in yields does not appear to be driven by the concerns expressed by some that the asset purchase program would unleash a considerable rise in U.S. inflation and inflation expectations, Sack said.

Longer-term inflation expectations have stayed consistent with the Fed's price stability mandate, risky asset prices have risen, and the dollar has held its ground, he said.

The Fed's approach to implementing the purchases -- presumably some of the largest and most rapid portfolio adjustments that have ever taken place by any single financial market participant -- was flexible enough to avoid significant market distortions, he said.

Sack said the Fed has received competitive and appropriate prices for the bonds it has bought. He added that market liquidity appears to be decent and the Fed does not see signs of scarcity in any particular Treasury securities.

The Fed has not lost any momentum in its preparation for its eventual exit from easy money policy, Sack said.

He said more than 500 firms have registered for the term deposit facility and the New York Fed has added 58 money market funds as counterparties for reverse repurchase agreements.

Both tools would be ways for the Fed to tighten policy by temporarily draining reserves from the financial system.

The amount of income the Fed's portfolio will generate over the long-term is uncertain, Sack said. But any losses the Fed would incur if interest rates moved up abruptly would not affect its ability to implement monetary policy, he said.

(Reporting by Kristina Cooke; Editing by Leslie Adler)