The Quiet Pivot
With the recent FOMC meeting signaling a slowing of the taper, and adjustments being made to the QRA, is the pivot finally here?
This last week, Jerome Powell finally announced the long-awaited Taper.
At the FOMC meeting, he announced that as of June 1, the Fed will decrease the maximum amount of Treasury securities allowed to mature without replacement from $60 billion to $25 billion per month. The cap for mortgage-backed securities remaining on its books will stay at $35 billion monthly, with any surplus MBS principal payments being reinvested into Treasuries.
Powell also mentioned that the adjusted caps are expected to lead to approximately $40 billion per month in total balance sheet reduction. He hinted at past instances where actual bond reductions often didn't meet the caps, particularly regarding mortgage bonds- basically implying that the runoff would be even less than the maximum set by the Federal Open Market Committee.
This means that the Fed will be reducing its balance sheet at around half of its previous pace, slowing the rate of destruction of money. The irony here is that ostensibly, tapers are supposed to begin with a financial crisis, and currently we aren’t in one.
At least, not on the surface.
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