The Federal Open Market Committee has been talking for months about normalizing its balance sheet, which currently is comprised of over $6 trillion in mortgage-backed securities and $4.5 trillion in bond holdings. Now, it looks like that day is inching closer by the minute, and could arrive as early as this fall.
According to a recent report by Bankrate.com, the Fed’s plan is to start slow—chipping away a total of $10 billion a month, $6 billion in government debt and another $4 billion in mortgage-back securities. Eventually, the goal is to increase that number to $50 billion a month.
The Fed first started buying up Treasury bonds and mortgage-backed securities to keep long-term interest rates down in response to the Great Recession, but they now feel it to be the appropriate time to allow long-term rates to return to what has historically been a normal level. Further, the Fed wants to ensure that it can continue to help the next time the economy falls into a recession. According to Bankrate.com, with the Fed’s bond holdings as high as they are and interest rates as low as they are, they’re hands will be tied if they want to provide assistance.
What could that mean, though? First, the report cites rising mortgage rates, due to the fact that mortgage rates are tied to yields on 10-year treasury bonds. When the Fed unloads its long-term treasuries, bond prices should decrease while yields increase, resulting in higher costs when financing a home.
Second, the stock market, which has been consistent in is overall increase, will show more signs of volatility and “choppier days.” The report also says that economic growth should slow once the Fed changes its monetary policy.
Once the Fed actually starts reducing its balance sheet, the consequences will become more apparent. But looking forward never hurt anyone.