on August 30, 2022 by Staff in Uncategorized, Comments Off on Federal Reserve reduces bond holdings – Easing ends

Federal Reserve reduces bond holdings – Easing ends

As the aftermath of Jackson Hole continues to spread across markets, investors have their sights set on even more drama stemming from the central bank. The Federal Reserve will this week accelerate the pace of its quantitative tightening program (QT). The move is a shocking change from the bond buying of the pandemic that saw the central bank nearly double its balance sheet to nearly $9T from $4.2T over the past two years.

A bigger picture: Unlike massive rate hikes that are being announced by the Fed – which have been quick to capture the attention of investors, QT is more obscure method of tightening financial conditions. Be aware that the central bank is not selling its Treasury holdings in a straight-line manner however, it is let them mature and reduce its balance sheet. After a slow start, monthly caps for the sale of Treasuries or mortgage-backed securities will increase to $60 billion and $35 billion respectively, compared with the maximum combined rate of $50 billion in 2017-2019.

Although the whole thing is a complex accounting process that involves redemption caps as well as settlement windows, it reduces reserve in banks and drains money out of the financial system. After the turmoil in the repo market resulted in the early termination of the QT program in the year of 2019 Some security measures were put in place like the Standing Repo Facility. The new facility will allow primary dealers to take out more reserves from the Fed with collateral of high quality, but some caution it might not be enough to ward off liquidity issues. This could hinder Chair Powell’s plan to raise rates and keep inflation under control.

Comments are disabled.