The Fed will face a series of headaches as it attempts to shrink its portfolio of mortgage-backed securities. Extracting itself from this market risks crashing the housing industry and creating intense political blowback for incurring financial losses.
, and the number was falling rapidly. But when the pandemic took hold, the central bank began a new round of bond purchases , swelling that number to $2.7 trillion.
The Fed says that by September it will reduce the mortgage portfolio by up to $35 billion per month. Emphasis on "up to."The reason: For now, the Fed is just looking to let its holdings shrink as securities get paid off. But with mortgage rates way up in recent months, people have little incentive to sell their home or refinance a mortgage — so these mortgages are likely stay on the Fed's books longer.with unappealing options.
"I'm certainly open to a targeted and disciplined way to sell into the market if we're not headed toward the primarily Treasury balance sheet that we've said we want," he said.its own problems. If the Fed sells mortgage securities that pay low rates at a time when prevailing rates are much higher, it will incur big financial losses that reduce the funds the central bank returns to the Treasury.
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