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Fed's new balance plan: get rid of MBS

In relation to GDP, the balance sheet continues to shrink until some magically unknown point is reached.

The Fed has a new plan for what to do with its balance sheet and today announced several important parts of it: [19659003] Begin reducing the flow of government bonds in May.

  • Finish settlement of government bonds on September 30.
  • Continue winding up securities with a maximum of $ 20 billion per month, essentially
  • After September, MBS re-invests its principal payments into government bonds.
  • Chairman Jerome Powell said during the press conference that the balance sheet will then be "a little over $ 3.5 billion".
  • The balance sheet will remain at this level even when the economy grows, which slowly shrinks 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 sensitive 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 pronounced balance doctrine is now that the Fed wants sufficient reserves (money banks deposit at the Fed) to effectively implement monetary policy. The interest paid by the banks on these reserves is one of the most important tools for managing short-term interest rates.

    Securities of Riksbank .

    At present, it is possible to expect that interest-bearing securities are put in the balance sheet of $ 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 bonds, notes, TIPS and Floating Rate Notes (FRN) on the Fed's balance sheet maturing until September. Reducing the cap from $ 30 billion to $ 15 billion, the Fed lowers the runoff by a total of $ 48 billion. Instead of disposing of $ 173 billion in government debt under the old plan, it will instead throw $ 125 billion:

    At present, the Fed holds $ 2,175 billion in government bonds. At the end of September, this will be down to about $ 2.05 trillion.

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

    The Fed continues to allow MBS (and the small amount of the agency's debt remains) to roll off up to $ 20 billion per month.

    As of October, it still allows MBS to roll off that course. But it will reinvest up to $ 20 billion of the principal payments it receives in government bonds. In other words, it will gradually replace its MBS with treasures, "in line with the goal of holding primarily government bonds in the longer term."

    The maturities of these replacement funds will go across the entire range, including bills (one year or

    And one kicker: It may sell some MBS directly: "Limited agency sales MBS may be eligible in the longer term to reduce or eliminating remaining holdings ".

    In relation to GDP, the balance sheet continues to shrink.

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

    The reserve is debt. The other main responsibility in the balance sheet is currency in circulation (actual paper dollars filled in mattresses around the world). Currency in circulation is continuously increasing, as a function of demand for dollars via the banking system.

    Holding total debt flat, even as part of debt (currency in circulation) increasing means that the other main part (reserves) will decrease further. It is the intention to keep the balance sheet flat: Slowly lower the reserve amount.

    Before QE, the Fed began to balance the balance sheet as a function of currency in circulation and reserves. In relation to GDP, the growing balance sheet was roughly in the range of 4.5% and 6% of GDP. During peak QE at the end of 2014, assets reached about 25% of GDP, according to Powell at the press conference today; and he expects them to reach 17% of GDP by the end of September.

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

    When the reserve is released to this still unknown magic minimum "necessary for effective and efficient policy implementation" – so next year or for 10 years – the Fed will go back to growing its balance sheet in line with the economy it had done before QE began .

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

    The balance treatment is not related to monetary policy he said. "We think of the interest rate tool as the primary tool for monetary policy. And we think of ourselves as restoring the balance sheet to a normal level over the next six months. We do not really think about them as two different tools for monetary policy.

    He was asked for a "lowering" at the turn of the year . And he said, "The data we see does not currently show a signal that indicates that they are moving in any direction, which is really why we are patient. We believe that our policy rate is within the neutral area, the economy is growing at a trend, inflation is close to the target, unemployment is below 4% …. It is a good time for us to be patient and look and wait and see how things develop. "

    Not yet" gripping "with a decision on maturities: Changing some of their holdings longer futures and bonds to short-term bills can give rise to pressure on long-term interest rates, raise mortgage rates and increase the yield curve. In other words, a delicate decision. "We really haven't started to have a serious series of discussions about a series of meetings to deal with it," he said. "This is the next big decision we will face. I don't think we'll be in a hurry to solve it. "The albatross of $ 617 billion in bonds maturing over 10 years hangs around the Fed's neck. Read … Fed's QE Unwind reaches $ 501 billion, Balance falls below $ 4 trillion." Autopilot " Engaged

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