Readers who have been with us for a while know this stuff but the writer, Chris Anstey, ties it into a tight little bundle. And as with scorpions and Shakespeare, the sting is in the tail.
From Bloomberg, August 17:
Quantitative Flatlining
The Federal Reserve is currently in the midst of shrinking its bond holdings as well as raising interest rates, only for the second time in modern history. And the more experience observers get of the phenomenon, the more complex it seems.Next month, the Fed is scheduled to step up its so-called quantitative tightening to a maximum pace of $95 billion — running off up to $60 billion in Treasuries, and $35 billion of mortgage securities. Since June, the monthly cap has been a total of $47.5 billion. But last month, the Fed only ran down its portfolio by only about $22 billion.
In fact, the overall size of the Fed’s balance sheet isn’t much different today, at $8.9 trillion, than when it started tightening monetary policy back in March.
Analysts at CrossBorder Capital call it “the Fed’s QT summer lull,” and draw a link with that and the rebound in equities and credit seen in recent weeks.
“This has lifted risk assets from the summer doldrums and punctured the dollar’s meteoric rise,” CrossBorder Capital wrote in a note on Thursday.So what gives?Much of this is down to the oddities of mortgage-backed securities. For now, the Fed isn’t seeing enough of the bonds maturing to allow for shrinking the portfolio much.
When there are fewer mortgage refinancings, the bonds don’t mature as quickly. And given the jump in mortgage rates in recent months, there’s not a whole lot of refinancing going on. Which leaves more of the bonds on the Fed’s balance sheet.The disconnect between the Fed’s need to tighten policy to get inflation under control and the somewhat limited role that its second policy lever is playing could argue for stepping things up a gear — by shifting to outright sales of mortgage securities.
Most Fed watchers haven’t expected that to happen until next year at the earliest. But Vice Chair Lael Brainard, in a speech laying out the various options for balance-sheet runoff back in 2017, noted the scenario of using QT as an active policy tool. Evercore ISI analysts said in a note Thursday the Fed “will need to return to the question of active sales at some point.”
“Discussion of QT in general could prove a useful weapon in a broader effort to regain some traction on financial conditions,” Krishna Guha and Peter Williams wrote....
....MUCH MORE (non-QT, it's his newsletter)
