Robin Harding

I’ve been thinking about what Fed chairman Ben Bernanke said in his press conference about reinvestment of maturing assets from the Fed’s portfolio.

“At some point, presumably early in our exit process, we will – I suspect based on conversations we’ve been having around the FOMC table it’s very likely that an early step would be to stop reinvesting all or a part of the securities which are maturing. But take note that that step, although a relatively modest step, does constitute a policy tightening, because it would be lowering the size of our balance sheet and therefore would be expected to essentially tighten financial conditions.”

If it is the stock of Fed assets that matters, as the Fed believes, there is no doubt that this is literally correct. Reduce the size of the balance sheet and you tighten monetary policy.

But the direct tightening would be incredibly small. I think a much more pertinent reason for Mr Bernanke’s comments is to send a signal that short-term interest rates are going to stay low and discourage the market from pricing in an earlier tightening. Read more

Robin Harding

The New York Fed announced today that it expects to buy $27bn of Treasuries between mid-September and mid-October as it starts reinvesting the principal from mortgage-backed securities that are paid back early.

That number is no surprise. In his Jackson Hole speech, Ben Bernanke said that the Fed now expects about $400bn worth of MBS repayments by the end of 2011. Divide $400bn by the sixteen months between now and then and you get about $25bn.

I think the Fed should go a lot further with transparency on its MBS repayments, however. An important reason that the markets did not expect the August decision to start reinvesting MBS repurchases – leading to sharp moves and fears about the Fed’s economic outlook – is that they did not know the Fed had revised up its forecast for MBS repayments. Read more