Expectations are currently that the Federal Reserve will announce plans to begin unwinding its balance sheet this Wednesday. When you consider that the Fed currently owns around 29% of the market for mortgage-backed securities and 17% of the market for Treasuries, you might be tempted to scream OMG!
But before you do, recognize that plans have been in place for this for quite some time, and the market has already had plenty of time to react. Not only that, but the Fed will continue to take the same ‘steady as she goes’ attitude that has been a hallmark of Janet Yellen’s time as Fed chair.
Back in June, the Fed outlined how this process would likely unfold. They will begin by allowing $10 billion of assets ($4 billion of mortgages and $6 billion of Treasuries) to roll off the balance sheet each month. As time goes by, assuming the economy and financial markets don’t throw too big a fit, the roll-off amounts will continue to rise, up to a maximum of $50 billion per month.
One thing that’s important to understand is that during this process, the Fed will not actually sell any bonds. Instead, they will simply allow bonds to mature, and not reinvest the proceeds. This means that the incremental effect to the mortgage and Treasury markets should be mild, and not represent the ‘severe tightening’ that some analysts are making it out to be.
This post was published at FinancialSense on 09/19/2017.