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Strategies & Market Trends : News Links and Chart Links

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Dec 1 4:00 PM EST

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To: Les H who wrote (27346)	9/17/2022 8:29:27 PM
From: Sam	Read Replies (2) of 29601

Now the Fed is on a path to unwinding those securities as the economy continues to regains its footing and recover from the pandemic. In September, the Fed boosted its monthly balance sheet runoff to $60 billion of Treasurys and $35 billion for mortgage backed securities, for a total of $95 billion per month. If the Fed sticks with those monthly reduction plans, its balance sheet should decline by $1 trillion each in 2023 and 2024. But to get its holdings back to a pre-pandemic level of about 20% of GDP, as suggested by Fed Governor Chris Waller, NDR estimates the Fed would need to unwind $2.8 trillion of securities by April 2025. I don't get why the Fed has to do it by April 2025. They always said that they would do it gradually, which made a lot of sense to me. Would it be disastrous if they took until, say, 2027 to do it while maintaining more stable and less volatile markets? The consequences of doing working down the balance sheet quickly are almost certainly disastrous--a recession, perhaps a really bad recession. Which might be avoided with less stressful financial conditions. Of course, such a reduction would have a big impact on both stock and bond markets – and in fact, it already is. Trading liquidity in government bonds has declined significantly since the Fed unveiled its balance sheet reduction guidance in minutes released in April, as measured by the Bloomberg US Government Securities Liquidity index. The index is currently showing "stressed liquidity conditions" and is already sitting at levels seen during the height of the COVID-19 pandemic in March 2020. What's worse is the liquidity deterioration in Treasurys is starting to spill over into the corporate bond market. "The Fed may be creating different problems this time. Trading liquidity has been steadily getting worse all year and rivals the worst of the March 2020 period. Corporate distress has also risen," NDR said. more at the link-- markets.businessinsider.com

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