The FED: Are MBS Sales Coming?
Raising gross MBS QT to $55B/month would attack housing inflation, eliminate the need for rate hikes, provide relief to Treasury, and tighten financial conditions.
Discussion
Close FED watcher David Zervos believes the Fed eased in a stealth manner (interview clip is no longer available) at the May FOMC by tapering back on UST QT from $60 to $25B/month. But given Kashkari’s aggressive pushback against the post-NFP rally in asset prices, just four trading days post-supposed FED easing via QT tapering, it doesn’t appear the Fed meant QT tapering to be an ease. Something else could be in the works here, and it would not surprise me if the Fed is laying the groundwork for outright sales of MBS.
The Case for MBS Sales
Sticky housing services inflation is garnering increased attention by the FOMC, and this morning Nick Timiraos officially codified the concern.
But the Fed continues to slow-walk toward more hikes. The dovish interpretation is that the Fed still believes inflation is “long transitory”; the hawkish interpretation is the Fed knows more hikes are coming, but wants to smooth out the market’s transition to that reality; while the alternative interpretation is that the Fed wants long-term interest rates to take the tightening reins from Fed Funds.
But if the Fed wants long-term rates to take over, why reduce the pace of QT?
In his May press conference Chair Powell specifically noted two things as it relates the QT program: 1) MBS QT is running at about $15B/month, and 2) any MBS QT proceeds above the $35B monthly cap will be reinvested in UST securities.
Active sales of MBS securities would very smoothly target monetary policy toward the achievement of four key policy objectives, as they would:
Directly target housing, the key obstacle in completing the last mile of the inflation fight.
Allow the Fed avoid further hitting Main Street with an even higher Fed Funds.
Provide funding relief to Treasury via proceeds generated above the $35B cap.
Tighten financial conditions by keeping total QT within range of the pre-taper level of $75B/month.
If gross MBS QT is raised to $55B/month, $20B above the cap, Treasury gets $20B of monthly deficit relief while total monthly QT moves up to $60B, within range of the pre-taper $75B level.
This would certainly be a big step relative to consensus expectations, but in my assessment of the various and complicated moving pieces of macro developments and FED policy guidance, raising gross MBS QT to $55B makes all the policy sense in the world with inflation stuck at 3%, the deficit running at 5-10% of GDP, and asset prices at all-time highs.
Would love to hear that this was discussed in the minutes.
March 1st speech
I dont know how you get down to zero on MBs any time soon without selling