The Fed’s Announced Plan
- For agency debt and agency mortgage-backed securities, the cap will initially be set at $17.5 billion per month and after three months will increase to $35 billion per month.
- For Treasury securities, the cap will initially be set at $30 billion per month and after three months will increase to $60 billion per month.
- To ensure a smooth transition, the Committee intends to slow and then stop the decline in the size of the balance sheet when reserve balances are somewhat above the level it judges to be consistent with ample reserves.
The above from Plans for Reducing the Size of the Federal Reserve’s Balance Sheet
Balance sheet reduction labeled Quantitative Tightening (QT) started in June.
When QE ended, the Fed reinvested any maturing securities to maintain the size of its balance sheet. With QT, the Fed stopped reinvesting up to $30 billion in maturing Treasuries and $17.5 billion in maturing MBS every month, passively shrinking its assets as those securities “roll off” without being replaced. Those caps rose to $60 billion and $35 billion, respectively, in September.
From that viewpoint, we have had 3 months of QT at the lower schedule and 5 months at the higher schedule.
To give the Fed some additional leeway on mortgages, let’s calculate everything from the peaks rather than June.
Max Balance Sheet Drawdowns vs Actual Drawdowns
- Maximum Treasuries = (3 * 30) + (5 * 60) = $390 Billion
- Actual Treasury Drawdown = $5.771 Trillion – $5.397 Trillion = $374 Billion
- Maximum MBS = (3 * 17.5) + (5 * 35) = $227.5 Billion
- Actual MBS Drawdown = $2.740 Trillion – $2.625 Trillion = $115 Billion
There is a lag of up to 30 days in reporting due to settlement issues, so the Fed is on its maximum schedule for Treasuries.
The Fed is only about 50% of where it should be regarding Mortgage Backed Securities.
It’s going to stay behind planned maximum MBS runoff because mortgage refinancing is essentially nonexistent and mortgage payoffs due to existing home sales are in the gutter.
Existing Home Sales Decline for the Eleventh Straight Month
On January 20, I noted Existing Home Sales Decline for the Eleventh Straight Month
Due to falling mortgage rates, there will be a small uptick in mortgage applications in the next few months.
However, housing transactions are not going back to the volumes that would allow a $35 billion per month reduction of MBS on the Fed’s balance sheet.
This post originated at MishTalk.Com.
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