By: Financial Advisor Tim Hayes - posted in: Economy, Markets, and Interest Rates - Last updated Sep 11, 2019

The Federal Reserve’s Balance Sheet Troubles

by | Last updated Sep 11, 2019 | Economy, Markets, and Interest Rates

Does anybody know why the Federal Reserve is having such a hard time reducing the amount of mortgage-backed securities (MBS) on its balance sheet?

Seven months into a plan where $36 billion should have been shrunk, only $14 billion has been reduced. (The Federal Reserves owned $1.68 trillion of mortgage-backed securities when they started)

In contrast, they have reduced their holding of Treasury Bonds by $52 billion, which is pretty close to the scheduled amount of $54 billion. (The Fed owned $2.465 trillion of treasuries)

Reducing mortgage-backed securities should not be that hard. People pay their mortgages the Federal Reserve deletes those payments from the money supply, causing an equal amount gets subtracted from their balance sheet.

If the Fed does not pick up the pace, and we end up in a recession before they significantly reduce their balance sheet, our economy risks morphing into a Japanese style malaise.

No longer capitalistic where private banks create the money supply but one where a Central Bank by reinvesting maturing bonds into new bonds with money they created finances the government’s debt which then establishes the public’s money supply.

Read more: The Fed Balance Sheet Reduction Schedule

Notes

Bloomberg. “2018 Economic Calendar”, April 12,2018. https://www.bloomberg.com/markets/economic-calendar

These are the opinions of Tim Hayes and not necessarily those of Cambridge Investment Research. They are for informational purposes only, and should not be construed or acted upon as individualized investment advice. 

About Financial Advisor Tim Hayes

Tim Hayes AIF®, CRPS®, AWMA®, CFS®, APMA®

Registered with Cambridge Investment Research, Inc., a broker-dealer with over 3,000 Registered Representatives nationwide. Investment Adviser Representative at Cambridge Investment Research Advisors, Inc., a $94B RIA based in Fairfield, IA. I've held an industry securities registration for 26 years and am subject to SEC and FINRA oversight.

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