The Federal Reserve is moving forward with plans to reduce the massive portfolio of mortgage-backed securities held on its balance sheet.
Slowly expanding on its plans after the each of the most recent Federal Open Market Committee meetings, the Fed revealed after its June meeting that it will start selling off its trillion-dollar bond portfolio later this year, with an official start day still not locked in.
Nick Timiraos stated in an article in The Wall Street Journal that the move marks the latest test of the economy’s ability to grow on its own as the central bank starts to dial back years of quantitative easing.
After the financial crisis, the Fed snatched up billions of dollars in bonds to boost the economy by keeping interest rates low, as part of its quantitative easing mixed with bailout deals.
“The Fed will begin to reduce the securities held on its balance sheet later this year, limiting the amount of securities that will be allowed to run-off each month. With lower caps for mortgage-backed securities compared to Treasuries, it is possible that there will be less widening in mortgage spreads than previously estimated,” said Mortgage Bankers Association Chief Economist Mike Fratantoni.
“The plan emphasizes that the balance sheet will be reduced in a gradual and predictable manner and as Chair Janet Yellen described in the press conference, the process will be ‘running quietly in the background’ if economic growth and inflation continues as expected,” he added.
From the article in the WSJ:
The Fed stopped adding to its holdings, also known as its balance sheet, in October 2014, but it has continued to reinvest the proceeds of maturing assets to maintain the portfolio’s size.
Plans revealed by the Fed on Wednesday would start reducing the central bank’s holdings gradually by allowing a small amount of net maturities every month. It would start by allowing up to $6 billion in Treasury securities and $4 billion in mortgage bonds to roll off without reinvestment, and let those amounts rise each quarter, essentially setting a speed limit for the wind-down.
The limits would ultimately rise to a maximum of $30 billion a month for Treasurys and $20 billion a month for mortgage-backed securities.
However, the article added that the timeline for this is up in the air:
Ms. Yellen said if the economy performed in line with the central bank’s forecasts, the Fed could set those plans into motion “relatively soon,” which market strategists believe could mean September or October.
Other than plans for the balance sheet, the June meeting also announced that the FOMC voted to raise the target range for the federal funds rate by 25 basis points to a range of 1% and 1.25%.
The Fed first announced it raised interest rates this year during its March meeting when it increased the federal funds rate by 25 basis points to a range of 0.75% to 1%.
Then prior to the March meeting, the Fed raised rates in its December 2015 and December 2016 meeting.
