Fed Balance Sheet Plan Leads to Massive Acquisition of Securities

From 2008 to 2014, the Fed balance sheet plan entailed numerous acquisitions. During this time period, the Federal Reserve entered a quantitative easing. While doing so, the Federal Reserve Dacquired trillions of dollars of Fannie Mae, Freddie Mac, and Ginnie Mae mortgage-backed securities. Additionally, the Federal Reserve purchased United States Treasuries.

Fed Balance Sheet Plan Over Time

Over time, the Fed balance sheet plan grew from under $1 trillion to over $4 trillion. A few years ago, the Federal Reserve stopped adding to its holding. However, the Federal Reserve maintained a policy to reinvest principle payments received. Thus, the Federal Reserve maintained a steady level of investments.

At times, refinancing activity soared over the last few years. Throughout these periods, the Federal Reserve reinvested the principle payments it received. Overall, the Federal Reserve became the buyer of the vast majority of all newly issued agency mortgage-backed securities. Recently, the Federal Reserve bought approximately 25% of newly issued Agency mortgage-backed securities. Ultimately, the Federal Reserve’s demand for agency mortgage-backed securities leaves a positive impact on mortgage rates.

Recent Changes to the Plan

For the past few months, Federal Reserve speakers claimed that a time for “normalizing their holdings was near”. Having said that, they provided few new details regarding the Fed balance sheet plan. After the Federal Reserve’s May 3rd meeting minutes released on the 24th, additional details came to light. However, the vast majority remains unknown.

Currently, the plan calls for the Federal Reserve to tell investors the maximum amount it will allow its holdings to decline each month. The Federal Reserve plans to increase that amount after three months. Beyond that, the increases continue again every three months until the amount reaches the Fed’s maximum targeted levels.

Then, reductions persist at this final amount until the balance sheet normalizes. Analysts anticipate that this event takes place over the course of many years. Conclusively, the minutes illustrated that nearly all Fed policymakers expect to begin the process this year.

Future Outlook for the Fed Balance Sheet Plan

In terms of the Fed balance sheet plan, the amount of reduction remains a big unknown factor. Analysts wonder how much reduction will be allowed during the first three months of the plan. In addition, analysts question how much the monthly reduction will grow.

Similarly, no one knows the actual size of a “normalized balance sheet”. As it relates to the mortgage industry, professionals concern themselves with the speed with which the Federal Reserve shrinks its holdings of mortgage-backed securities.

Although many questions remain, investors show pleasure at a plan that intends to minimize market disruptions. Subsequentially, mortgage rates improved slightly after the minutes published.

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2022-04-02T15:28:35+00:00 May 25th, 2017|Categories: News|Tags: , , , , , |