On May 4, the Fed released its plan to achieve a balance sheet reduction of $60 billion a month in Treasuries and $35 billion a month in MBS. The latter is fake.

Fed's balance sheet courtesy of the New York Fed, chart by Mish

The announced Plan is Bogus

The chart above shows the Fed's announced plan is bogus. 

To understand why, please consider the Fed's Plans for Reducing the Size of the Federal Reserve's Balance Sheet, emphasis mine

1. The Committee intends to reduce the Federal Reserve's securities holdings over time in a predictable manner primarily by adjusting the amounts reinvested of principal payments received from securities held in the System Open Market Account (SOMA). Beginning on June 1, principal payments from securities held in the SOMA will be reinvested to the extent that they exceed monthly caps.
2. For Treasury securities, the cap will initially be set at $30 billion per month and after three months will increase to $60 billion per month. The decline in holdings of Treasury securities under this monthly cap will include Treasury coupon securities and, to the extent that coupon maturities are less than the monthly cap, Treasury bills.
3. For agency debt and agency mortgage-backed securities, the cap will initially be set at $17.5 billion per month and after three months will increase to $35 billion per month.
4. Over time, the Committee intends to maintain securities holdings in amounts needed to implement monetary policy efficiently and effectively in its ample reserves regime.
5. To ensure a smooth transition, the Committee intends to slow and then stop the decline in the size of the balance sheet when reserve balances are somewhat above the level it judges to be consistent with ample reserves.

Point 3 is the problem. 

The Fed announced a natural runoff. That is, the Fed will not reinvest interest or principal payments or securities that have reached maturities. Nor will the Fed resort to outright sales from its balance sheet.
 

Duration Mismatch 

Check out the duration of Treasuries and MBS in my lead chart. There is room for Treasury runoffs.

But as of May 12, MBS looks like this.
 

Fed's MBS Balance Sheet Holdings

• Within 15 Days: $0
• 16-90 days: $1 Million
• 91 days to 1 year: $53 Million
• Over 1 year to 5 Years: 2.1 Billion
• Over 5 Years to 10 Years: $62.6 Billion
• Over 10 Years $2.65 Trillion
   

Nature of the Lie

Q: How is the Fed going to do $350 billion a year in MBS reduction when there will be no refinance operations and a lousy $54 million in natural runoffs?
A: It won't and the Fed purposely put out a disingenuous proposal it knew it would never meet. A lie is a better description.
 

Backing Off the Announcement

New York Federal Reserve President John Williams tried to whitewash the Fed's lie on Monday. 

Reuters reported Sales of Fed's mortgage-backed securities may be future option

Williams said MBS sales are not under consideration for the first stages of the plan unveiled this month to pare down the Fed's $9 trillion balance sheet starting in June. Speaking to a Mortgage Bankers Association conference, Williams said "once our balance sheet reduction is well underway ... that is an option that the Federal Open Market Committee (FOMC) could consider."

U.S. central bank officials are confident the $60 billion monthly cap they have established for redemptions of Treasury securities during the quantitative tightening process should be achievable on a consistent basis. But Williams said the $35 billion monthly target for MBS redemptions may prove harder to reach each month.

"That's a pretty big number," Williams said. "Our own forecasts are that we wouldn't see $35" billion every month especially now that the jump in interest rates on mortgages has dramatically slowed refinancing activity.

Hoot of the Day

"Our own forecasts are that we wouldn't see $35" billion every month." 

What a hoot. Will it achieve $35 billion in any month?

I called the Fed out the moment it announced the plan on May 4. I used the Fed's own data in the lead chart to spotlight the inherent lie in their announcement.

Clearly, the Fed is very concerned about the QT of MBS despite their repeated statements they should not be holding mortgages. 

Genuine Free Money, Fed Style, Goes Straight to Banks

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