The Fed Will Not Hit Its Own Quantitative Tightening Schedule
The Fed will hit its QT schedule for Treasuries. But it will not come close to its target for mortgages…
Fed’s Mortgage Backed Securities forecast from NY Fed. Annotations by Mish.
On March 2, a New York Fed Study projected MBS principle payments based on its assessment of market rates. The above chart is from that study.
On May 4, the Fed announced a Statement Regarding Plans for Reducing SOMA Holdings of Treasury Securities, Agency Debt, and Agency Mortgage-Backed Securities. The following chart shows the expected QT.
Total Monthly Caps
QT Cap Synopsis
The Fed placed $17.5 billion MBS caps for June-August and $35.0 billion thereafter.
The Fed placed $30.0 billion Treasury caps for June-August and $60.0 billion thereafter.
The Fed can easily hit its Treasury targets. It has a massive balance sheet of every duration for runoffs to work without actively selling anything.
MBS is another matter and the results speak for themselves.
Fed Securities Held Outright Billions
Monthly Averages Balances via St. Louis Fed, chart by Mish
The yellow highlights and numbers show March average vs the July average. Let’s hone in on the changes.
Fed Securities Held Outright Change in Billions
Change in Monthly Averages Balances via St. Louis Fed, chart by Mish
Numerous people have claimed the Fed is missing its Treasury QT targets. The Fed is actually doing fine on that score because there are known settlement lags.
MBS is a disaster as I predicted from the outset. To understand the Fed’s dilemma, consider the Fed’s balance sheet by duration.
Fed’s Balance Sheet by Duration
Fed’s Balance Sheet data from New York Fed, chart by Mish.
Balance Sheet Analysis
The Fed has plenty of room to meet its QT schedule for Treasuries by natural runoff and it will.
The Fed has no room to meet its QT schedule for MBS by natural runoff.
It’s rather difficult to meet $30 billion in monthly MBS runoffs on a portfolio holding of $2 to $55 million.
The Fed needs prepayments (existing home sales) to meet its MBS targets. Well, guess what?
Existing Home Sales
Existing home sales courtesy of Trading Economics annotations by Mish
It would seem the Fed should have done a little bit better than $1.7 billion and $1.1 billion in the last two months, but that was it.
Even if there are delays in closing data, the Fed’s own projections show it will not hit its announced targets.
I suggest the Fed dramatically overestimated existing home sales and it will not come close to its MBS QT schedule unless it changes its policy and resorts to outright sales instead of runoffs.
But outright sales of MBS will put upward pressure on mortgage rates when housing is already collapsing.
Soft Landing? Forget It!
“A soft landing is being refuted every day by one company after another announcing layoffs. That they overhired. They’re not seeing adequate demand… I think a soft landing is kind of fantastical at this point. “#Fedhttps://t.co/m43hmxqgTz
— Danielle DiMartino Booth (@DiMartinoBooth) July 28, 2022
Recession Started in May
However, a recession did not start in Q1. I peg the start month as May. See the above link for details.
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Fri, 07/29/2022 – 08:50