SPY - Fed Update: The Fed Has A Mortgage-Backed Securities Problem

2024-06-27 09:21:52 ET

Summary

• The Fed implemented QE in response to the 2008 GFC, intended to be temporary.
• Policy Normalization Plan included raising interest rates, reducing balance sheet, and transforming asset holdings.
• The Fed is facing challenges in returning to pre-GFC asset composition, particularly with MBS holdings.

When the Fed implemented Quantitative Easing ("QE") in response to the Great Financial Crisis ("GFC") of 2008, it was always intended to be temporary.

In 2014, the Fed developed a Policy Normalization Plan to reverse the QE measures. This plan had three key steps:

1. Begin increases in short-term market interest rates.
2. Reduce the size of the balance sheet, more commonly known as Quantitative Tightening ("QT.")
3. Transform the Fed’s asset holdings to a composition similar to the pre-GFC times. This transformation would include reducing the average maturity of the assets and returning to a portfolio comprised of mainly US Treasury securities.

For further details see: