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Fed's new balance sheet: get rid of MBS



Compared to GDP, the balance will continue to shrink until a magically unknown point is reached.

The Fed has a new plan for what to do with its balance sheet and today announced several major components of it: [19659003] Start reducing government bond maturity in May.

  • End the drain of government bonds on September 30.
  • Continue to abolish securities with a view to collateral at present maximum $ 20 billion a month, mainly until they are gone.
  • After September, MBS reinvests the principal bonds in government bonds.
  • Chair Jerome Powell said during the press conference that the balance would then be "just over $ 3.5 trillion".
  • The balance sheet will remain at this level even as the economy grows, thus slowly shrinking relative to GDP.
  • The Fed can sell MBS directly to speed up the process of getting rid of them.
  • No decision has been made on delicate issuance of the balance sheet maturity composition ̵
    1; which would require the purchase of short-term bills for the first time this year to replace long-term notes and bonds.
  • The deferred balance doctrine is now that the Fed wants to have sufficient reserves (money that bank deposits at the Fed) to effectively implement monetary policy. Interest rates that pay the banks on these reserves are one of the most important tools for managing short-term interest rates.

    Securities in securities .

    Currently, the number of government securities allowed to roll off the balance is capped at $ 30 billion a month. This cap will shrink to $ 15 billion a month in May.

    Only taxes that mature in that month can roll off. The table below shows the bonds, notes, TIPS and Floating Rate Notes (FRN) on Fed's balance maturing in September. By reducing the cap from $ 30 billion to $ 15 billion, the Fed is reducing its retirement by a total of $ 48 billion. Instead of throwing out $ 173 billion in Treasuries under the old plan, it will instead throw $ 125 billion:

    Currently, the Fed has $ 2.175 trillion in government bonds. At the end of September, this will be down to around $ 2.05 trillion.

    But MBS will roll off or be sold until they're gone.

    The Fed will continue to allow MBS (and the small amount of the agency's debt it still has) to roll off at a rate of up to $ 20 billion a month.

    Starting in October, it will still allow MBS to scroll off with that speed. However, it will reinvest up to $ 20 billion of principal payments it receives in government bonds. In other words, it will gradually replace MBS with Treasuries, "in line with the goal of keeping government bonds in the longer term."

    The maturity of these replacement taxes will go across the spectrum, including bills (one year or

    In a relationship: It may sell some MBS directly: "Limited agency sales MBS may be eligible for longer time to reduce or eliminate remaining holdings. "

    In relation to GDP, the balance will continue to shrink.

    At the end of September, the Fed is likely to find that the reserve level is still higher than" necessary to effectively and effectively implement monetary policy. " So the plan is to further reduce these reserves, but gradually.

    The reserves are commitments. The other main responsibility in the balance is currency in circulation (actual paper money filled into mattresses around the world). Currency in circulation increases continuously as a function of demand for dollars through the banking system.

    Keeping total liabilities flat, although some of the debts (currency in circulation) increase, means that the other h The spare part (s) will reduce longer. It is the purpose of keeping the balance flat: Slowly changing reserves.

    Before the beginning of QE, Fed's balance rose as a function of currency in circulation and reserves. In relation to GDP, the growing balance was largely in an area of ​​between 4.5% and 6% of GDP. During peak QE at the end of 2014, its assets reached around 25% of GDP, according to Powell at the press conference today; and he expects to be at 17% of GDP by the end of September.

    As the size of the balance sheets remains flat after September, and as the economy grows, the balance as a percentage of GDP will shrink further. That's the plan. During the press conference, Powell was asked if this slow shrinkage would continue. And he said, "The truth is, we don't know."

    When reserves fall to this still unknown magic minimum "necessary for effective and efficient policy implementation" – so next year or for 10 years – the Fed will return to increasing its balance in line with the economy, as it had done before QE .

    During Q&A at the press conference, Chair Powell clarified several hot-button issues regarding the balance sheet and monetary policy:

    The balance sheet processing is not linked to monetary policy he said. "We are thinking of the interest rate tool as the most important monetary policy tool. And we think of ourselves as returning the balance to a normal level over the next six months. We are not really thinking of them as two different monetary policy tools.

    He was asked for a "rate cut" by the turn of the year . And he said: "The data we see is not currently sending a signal indicating that they are moving in either direction, which is really the reason for that we are patient. We feel that our key rate is in neutral order, the economy is growing to about a trend, inflation is close to target, unemployment is below 4% …. It's a great time for us to be patient and see and wait and see how things are develops. "

    Not yet" gripping "a decision on maturities: Replacing some of their holdings longer-term notes and bonds for short-term bills can put pressure on long-term returns, raise mortgage rates and increase interest rates. , a delicate decision. "We really haven't started having a serious series of discussions over a number of meetings to intervene," he said. "This is the next big decision we face. I don't think we're going to be in a rush to fix it. "The $ 617 billion Albatross in maturities maturing for over 10 years hangs around Fed's throat. Read … Fed's QE Unwind reaches $ 501 billion, balance falling below $ 4 trillion." Autopilot. Engaged

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