She Who Controls the Money Supply of a Nation…

Money not only talks, but it sings and dances.  Therefore, when the Federal Reserve Bank talk’s people not only listen, but they analyze, strategize, speculate, and more.  The Fed’s power has significant influence over global financial markets and the world, making their words and actions of the utmost importance to us all.

Given the recent past and the scrutiny of the Fed, they have been forced to be more transparent than ever before.  Those interested in taking a closer look have the ability to review the information published.   Although most people know the Fed as the outfit that raises or cuts rate, the information here is to shed some light into the Fed’s additional actions in the mortgage-backed securities (MBS) market.

In October of 2014, the Federal Open Market Committee ended their Quantitative Easing program and at the same time maintained their asset purchases by reinvesting principal payments from their existing holdings.  See the official statement here,

The Federal Reserve Bank of New York publishes all of the asset transactions on their website,  Since November 1, 2014, $423.8 billion worth of agency MBS have been purchased (net) as part of this reinvestment program.  Below is a summary since 2012:

Fed Blog Chart

Fed Blog Buys Sells

As you can see, the asset purchases are still taking place just at a lower rate than the 2013 levels.  In 2015, the first full year of this reinvestment program, roughly $27 billion net purchases of agency MBS occurred per month.  We are at a similar pace through mid March of this year and the $23 billion estimate for next month aligns with around $300 billion per year.

The Federal Reserve’s unconventional programs continue with these reinvestments of principal to maintain low long-term interest rates, support the mortgage market, and provide accommodative financial conditions broadly.  All three of these have been of success in the short-term while many fear the future cost.

The debate around whether or not the Fed should increase short-term interest rates is important.  However, the Fed has been raising and lowering rates for over a century.  Their role in the mortgage backed securities market is new and should be a topic receiving more attention.

According to Securities Industry and Financial Markets Association (SIFMA), the size of the Mortgage-related and Federal Agency bond securities outstanding is roughly $10.7 trillion with roughly $2.2 trillion of issuance in 2015.

The Fed’s balance sheet currently holds $1.8 trillion MBS and is purchasing an average of $300 billion MBS per year.  This means they own almost 17% of the outstanding securities in this market and purchase almost 14% of annual new issuance.

There is a shared desire by most to have the Fed’s size and influence reduced.  However, when the institution controlling interest rates is a participant in the mortgage market at these levels the conflict will extend the time.  Raising rates will likely create a loss of principal value on the $1.8 trillion of MBS on their balance sheet.  Interest rates are likely to remain low for the foreseeable future as the unwinding of a balance sheet of this size is new and very influential.

Time heals everything.

All comments and suggestions are welcome.

Tony Basalla