On March 2, a New York Fed Study projected MBS principle payments based on its assessment of market rates. The above chart is from that study.
On May 4, the Fed announced a Statement Regarding Plans for Reducing SOMA Holdings of Treasury Securities, Agency Debt, and Agency Mortgage-Backed Securities. The following chart shows the expected QT.
Total Monthly Caps
QT Cap Synopsis
- The Fed placed $17.5 billion MBS caps for June-August and $35.0 billion thereafter.
- The Fed placed $30.0 billion Treasury caps for June-August and $60.0 billion thereafter.
The Fed can easily hit its Treasury targets. It has a massive balance sheet of every duration for runoffs to work without actively selling anything.
MBS is another matter and the results speak for themselves.
Fed Securities Held Outright Billions
The yellow highlights and numbers show March average vs the July average. Let’s hone in on the changes.
Fed Securities Held Outright Change in Billions
Numerous people have claimed the Fed is missing its Treasury QT targets. The Fed is actually doing fine on that score because there are known settlement lags.
MBS is a disaster as I predicted from the outset. To understand the Fed’s dilemma, consider the Fed’s balance sheet by duration.
Fed’s Balance Sheet by Duration
Balance Sheet Analysis
- The Fed has plenty of room to meet its QT schedule for Treasuries by natural runoff and it will.
- The Fed has no room to meet its QT schedule for MBS by natural runoff.
- It’s rather difficult to meet $30 billion in monthly MBS runoffs on a portfolio holding of $2 to $55 million.
The Fed needs prepayments (existing home sales) to meet its MBS targets. Well, guess what?
Existing Home Sales
- April 20: Existing Home Sales Decline Again, But the Big Bust Starts Next Month
- June 21: Existing Home Sales Skid Another 3.4 Percent in May, Down Fourth Month
- July 20: Existing Home Sales Dive Another 5.4 Percent in June, Down Fifth Month
It would seem the Fed should have done a little bit better than $1.7 billion and $1.1 billion in the last two months, but that was it.
Even if there are delays in closing data, the Fed’s own projections show it will not hit its announced targets.
I suggest the Fed dramatically overestimated existing home sales and it will not come close to its MBS QT schedule unless it changes its policy and resorts to outright sales instead of runoffs.
But outright sales of MBS will put upward pressure on mortgage rates when housing is already collapsing.
Soft Landing? Forget It!
“A soft landing is being refuted every day by one company after another announcing layoffs. That they overhired. They’re not seeing adequate demand… I think a soft landing is kind of fantastical at this point. “#Fedhttps://t.co/m43hmxqgTz
— Danielle DiMartino Booth (@DiMartinoBooth) July 28, 2022
Recession Started in May
Please note Second-Quarter GDP is -0.9 Percent, a Second Straight Decline.
However, a recession did not start in Q1. I peg the start month as May. See the above link for details.
This post originated at MishTalk.Com.
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Mish
Banks (TOTBKCR) is on a tear.
As Sheila Bair said: “It should
replace the shock and awe of major interest rate hikes with new targets based
on money supply, and aggressively shrink its portfolio, selling securities at a
loss to do so, if necessary.”
Never are the commercial banks
intermediaries in the savings->investment process.
See the pervasive error: “None of this would matter if
the Fed acted as an efficient savings-investment intermediary, as commercial
banks are able to do, at least in principle.” And: “This is nonsense, Spencer.
It amounts to saying that there is no such things as ‘financial intermediation,’
for what you claim never happens is precisely what that expression refers
to.” “Yes, I hold that commercial
banks are credit intermediaries and not just credit creators” — George Selgin
Commercial banks acquire earning assets through the creation of
new money. When commercial banks make loans to, or buy securities from, the
nonbank public -new money, demand deposits, are created — somewhere in the
commercial banking system.
From the standpoint of the forest, and not the trees, the
commercial banks do not loan any existing deposits, demand or time; nor do they
loan out the equity of their owners, nor the proceeds from the sale of capital
notes or debentures or any other type of security. It is absolutely false to
speak of the commercial banks as financial intermediaries not only because they
are capable of “creating credit” but also because all savings held in the
commercial banks originate within the banking system.
People don’t have an historical clue. Lending by the DFIs is inflationary (where S “≠” I). Whereas lending by the nonbanks is non-inflationary (where S = I), ceteris paribus.
The recipe was the fallacious Gurley-Shaw thesis.
“substitutability between money
and wide range of financial assets, also called near- moneys”
“an appropriate definition of
money must include the liabilities of non-bank financial institutions.”
R * revolves around the
activation of monetary savings. The impoundment of monetary savings lowers R *
and vice versa.
I’m not familiar with the specific facts or trends in the Tampa market, but I do have a question: Would you possibly be able to purchase a commercial property with an apartment attached? That way, your tenant would essentially be helping to pay your mortgage.
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Passing Bills With No Details
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