By: Tim Hayes Financial Advisor - posted in: Economy, Markets, and Interest Rates - Last updated Nov 13, 2018

Why the Federal Reserve is Having a Hard Time Reducing Their Balance Sheet

by | Economy, Markets, and Interest Rates

Does anybody know why the Federal Reserve is having such a hard time reducing the amount of mortgage-backed securities (MBS) on its balance sheet?

Seven months into a plan where $36 billion should have been shrunk only $14 billion has been reduced. (The Federal Reserves owned $1.68 trillion of mortgage-backed securities when they started)

In contrast, they have reduced their holding of Treasury Bonds by $52 billion which is pretty close to the scheduled amount of $54 billion. (The Fed owned $2.465 trillion of treasuries)

Reducing mortgage-backed securities should not be that hard. People pay their mortgages the Federal Reserve deletes those payments from the money supply causing an equal amount gets subtracted from their balance sheet.

If the Fed does not pick up the pace and we end up in a recession before they significantly cut their balance sheet our economy risks morphing into a Japanese style malaise.

No longer capitalistic where private banks create the money supply but one where a Central Bank by reinvesting maturing bonds into new bonds with money they created finances the government’s debt which then establishes the public’s money supply.

Notes

Bloomberg. “2018 Economic Calendar”, April 12,2018. https://www.bloomberg.com/markets/economic-calendar

These are the opinions of Tim Hayes and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice.

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