Go Back

The Fed Officially Announces Big Bond-Buying Change

Mortgage News Daily
by: Matthew Graham

Market participants sensed that the Fed was suddenly changing its tune with respect to its balance sheet back in January. The balance sheet primarily refers to all the bonds the Fed purchased as a part of the various Quantitative Easing plans conducted throughout the recovery to the Great Recession. At the time, those QE plans technically involved "printing money."

But it wasn't just money dropped from helicopters. The money was used to buy investments--in this case Treasury and Mortgage-Backed-Securities debt. Those bonds earn the Fed some income and they also get the principal returned when the bonds mature.

The Fed HAD been using that incoming principal to buy more of the same bonds until 2018, when they began letting the balance sheet "runoff" by a controlled amount each month. Eventually the "control" (a cap on how much they'd allow to NOT be reinvested) reached $30 bln/month. Today's changes mean that the Fed is reducing that cap to $15 bln in May. So in a month and a half, there will be an additional $15bln/month in bond buying, and that will ramp up to $30bln a month by September.

Net/net, this is like QE4, without the Fed needing to print any new money. They may say that they want to use their Fed Funds Rate as the key policy tool, but today' massive rally in bonds suggests markets are clearly willing to be influenced by the balance sheet.

NOTE: The Fed is making another change by finally shifting away from buying agency mortgage-backed-securities. They view the mortgage market as strong enough to generate its own demand--something its been doing fairly successfully since October 2018 when the Fed's reinvestments in MBS ran dry.

© 2006 - 2019. All Rights Reserved.