Well, that's a good question and I've no doubt the Fed would play down any attempt to predict policy or responses from the models used. Yet the models clearly show the moving parts in the balance sheets required to reduce and eventually eliminate the 'deferred asset'. It is clear there are only a limited number of effective moving parts available. So, if the Fed wishes to eliminate its 'deferred asset' it is obliged to follow the route outlined in these 2 papers - though possibly with some variation.
Do we have a sense of how the Fed thinks about the prioritization of eliminating the deferred asset against continuing QT? If I’m understanding these notes correctly, those two goals seem to be at odds. Every month they sell treasuries at higher interest rates, they’re taking losses because they bought those treasuries at lower interest rates (higher prices).
I could very well be missing something. I don’t have a good handle on the Fed’s QT guidance and its market impact.
My impression is the Fed has leeway to define balance sheet 'normalisation' - the extent to which the balance sheet will shrink. It therefore has plenty of space to eliminate the 'deferred asset' quick quickly - their models show it has may be eliminated in 3 years. But there is no free lunch. The reduction in 'deferred asset' comes because the Fed (in the models) restarts securities purchases. They will argue this is an organic growth, reflecting NGDP expansion, but if the Fed follows the path laid out in their papers, the Fed balance sheet will remain historically levels (~20% of GDP or slightly more).
As an additional point, the Fed, unlike the Bank of England, will not be selling bonds. Instead, the QE portfolio will be allowed to run off as holdings mature, without reinvestment. There are two balance sheet items in table H.4.1 reflecting unrealised losses, 1/ Unamortized premiums on securities held outright (last week this was US$ 309,491 bln) and 2/Unamortized discounts on securities held outright (last week US$ -27,533). I hope that helps.
Are “FEDS Notes” actual policy guidance or just some economists building models?
I wasn’t aware QT had a termination level or timeline. Much less aware that QE5 (or whatever number we’re on now) was a policy or market expectation.
Well, that's a good question and I've no doubt the Fed would play down any attempt to predict policy or responses from the models used. Yet the models clearly show the moving parts in the balance sheets required to reduce and eventually eliminate the 'deferred asset'. It is clear there are only a limited number of effective moving parts available. So, if the Fed wishes to eliminate its 'deferred asset' it is obliged to follow the route outlined in these 2 papers - though possibly with some variation.
Do we have a sense of how the Fed thinks about the prioritization of eliminating the deferred asset against continuing QT? If I’m understanding these notes correctly, those two goals seem to be at odds. Every month they sell treasuries at higher interest rates, they’re taking losses because they bought those treasuries at lower interest rates (higher prices).
I could very well be missing something. I don’t have a good handle on the Fed’s QT guidance and its market impact.
My impression is the Fed has leeway to define balance sheet 'normalisation' - the extent to which the balance sheet will shrink. It therefore has plenty of space to eliminate the 'deferred asset' quick quickly - their models show it has may be eliminated in 3 years. But there is no free lunch. The reduction in 'deferred asset' comes because the Fed (in the models) restarts securities purchases. They will argue this is an organic growth, reflecting NGDP expansion, but if the Fed follows the path laid out in their papers, the Fed balance sheet will remain historically levels (~20% of GDP or slightly more).
As an additional point, the Fed, unlike the Bank of England, will not be selling bonds. Instead, the QE portfolio will be allowed to run off as holdings mature, without reinvestment. There are two balance sheet items in table H.4.1 reflecting unrealised losses, 1/ Unamortized premiums on securities held outright (last week this was US$ 309,491 bln) and 2/Unamortized discounts on securities held outright (last week US$ -27,533). I hope that helps.