Faster Quantitative Tightening? Not Anytime Soon Says Fed Governor Christopher Waller – Mish Talk

March 25, 2022

Not Anytime Soon

“Investors are bracing for the central bank to cut back its mortgage holdings by no longer using the principal it gets back to buy more MBS. Eventually, the Fed may look to start selling its remaining MBS as it tries to get its assets down to Treasuries only, but that selling won’t happen anytime soon, Fed Governor Christopher Waller said on Thursday.”

The above snip is from Bloomberg. I cannot find a Waller speech where he made that exact statement but it did appear on Bloomberg Terminal.

Mortgage Refinancing Dead

The article also discusses mortgage refinancing. Consider it dead.

A Brean Capital analysts says less than 5% or mortgages can be refinanced lower.
An analyst at FHN Financial says “Taking out borrowers that are unlikely to be able to refinance or to bother, such as homeowners with relatively low loan balances, only about 0.15% of loans can be refinanced.”

How Serious is the Fed About Inflation?

For discussion, please see Raging Debate: How Serious is the Fed About Inflation?

Many and Faster Hikes

Serious QT to Steepen the Curve

Harvey Bassman
Joseph Wang

Baby Steps

Mish
Lacy Hunt
Steph Pomboy

I have yet to hear from any Fed president about starting a big ramp of QT. Indeed, Waller says “not anytime soon”.

FOMC Press Release

Here is a snip from the FOMC Press Release.

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With appropriate firming in the stance of monetary policy, the Committee expects inflation to return to its 2 percent objective and the labor market to remain strong. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 1/4 to 1/2 percent and anticipates that ongoing increases in the target range will be appropriate. In addition, the Committee expects to begin reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities at a coming meeting.

Key words: A Coming Meeting. There is no hint of urgency or size.

Fighting Inflation with Rate Hikes and Balance Sheet Reduction

Here’s an article by Waller on Fighting Inflation with Rate Hikes and Balance Sheet Reduction from February.

Based on my outlook, my preference is to increase the target range 100 basis points by the middle of this year. That is, I expect inflation to remain elevated and only show modest signs of deceleration over the next several months. As a result, I believe appropriate interest rate policy brings the target range up to 1 to 1.25 percent early in the summer.

Turning to balance sheet policy, as I noted, the Committee has decided to end asset purchases in early March. Initially, we will be keeping the size of the Fed’s balance sheet constant by reinvesting the proceeds of maturing securities. The FOMC has not decided when to begin the reduction in the size of the balance sheet, but we issued a set of principles last month that make it clear that changing the target range of the federal funds rate is our principal monetary policy tool, and that balance sheet reductions through the “runoff” from maturing securities would commence after rate hikes have begun.

With large caps and sizable amounts of securities maturing over the course of the next year or two, I do not see the need to consider asset sales anytime soon. However, because the Fed’s mortgage-backed securities (MBS) holdings have long maturities and are quite sizable, prepayments are unlikely to bring these holdings down to de minimis levels over the next decade. So, MBS sales could be something the Committee considers down the road to satisfy our balance sheet principles long run goal of holding primarily Treasury securities. But that is a conversation for another day. In the meantime, I would support having no caps on MBS redemptions so our MBS holdings decline as fast as prepayments allow, which would modestly assist in moving us toward an all-Treasury portfolio.

That supports my theory that the Fed will not be aggressive with QT, and will instead simply choose to not reinvest interest as the securities mature.

Press Conference Q&A

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Powell was more than a bit dovish all across the board in the Q&A Press Conference following the March rate hike by a quarter point.

Powell: Reducing the size of our balance sheet will also play an important role in firming the stance of monetary policy. At our meeting that wrapped up today, the Committee made good progress on a plan for reducing our securities holdings, and we expect to announce the beginning of balance sheet reduction at a coming meeting. In making decisions about interest rates and the balance sheet, we will be mindful of the broader context in markets and in the economy, and we will use our tools to support financial and macroeconomic stability.

Neil Irwin at Axios: In the Statement of Economic Projections, we see a forecast of median 1.9 percent fed fund rate at the end of year, 2.8 end of next year. Wondering whether that aligns with your own expectations in particular on that point of overshooting the long-term neutral rate. And, also, if you can tell us anything about how that might be paced, front loaded, back loaded, how high is the bar for doing 50 at one meeting?

Powell: Neil, I’ve never talked about my own SEC — SEP projection. It’s in there. But I — you know, I think Fed chairs have generally not done that because we just haven’t done it. It’s because we’re — you know, we have to put together the consensus on the Committee and present that consensus. So I wouldn’t talk about my individual one. And in terms of the pacing of it, I would just point out that that is — there’s seven remaining meetings this year. This isn’t something we discuss or debate or agree on, but there’s seven remaining meetings, and there’s seven rate hikes. I would add there’s also the shrinkage of the balance sheet which you people do the math different ways, but that might be the equivalent of another rate increase just from the runoff of the balance sheet. So I don’t — but I don’t know. We haven’t made any decisions on front-end loading or going steadily through the year.

JEAN YUNG: Hi, Chair Powell. I wanted to ask about the balance sheet discussion you had at this meeting. Can you give us any more details? Did you discuss whether to cap runoffs and — or whether to increase those caps over what period if there were any details?

Powell: Thank you for asking. So, at our meeting today and yesterday, we made excellent progress toward agreeing on the parameters of a plan to shrink the balance sheet. And I’d say we’re now in a position to finalize and implement that plan so that we’re actually beginning runoff at a coming meeting. And that could come as soon as our next meeting in May. That’s not a decision that we’ve made.

No Sense of QT Urgency

Powell reiterated “at a coming meeting”, not necessarily May. And the Fed is making “excellent progress on parameters”.

A runoff “could come as soon as May”, or perhaps not.

There is no sense of urgency here. Indeed, Powell set the stage for baby QT steps beginning later in the year, perhaps May, but June seems more likely.

Fed Governor Christopher Waller reiterated Powell’s message on Thursday.

Many and Faster Hikes vs. Baby Step Hikes

I am pretty confident we can rule out serious QT and perhaps any QT in May. But what about hikes?

Fed’s Choice

What About Stocks?

Stop Being Poor

Recession?