> it will incur big financial losses that reduce the funds the central bank returns to the Treasury...expect officials to face tough questions from Capitol Hill to explain why they've lost billions of dollars on behalf of the American people
This isn't how it works.
No doubt, some will try to spin it that way. But the Fed balance sheet's gains and losses are an accounting artefact. (It will always make money when lowering rates. It will always lose money when raising them. This is close to mathematical fact.) The Fed can't go broke. Its operating metrics are inflation and unemployment.
> the selling would likely push mortgage rates up further, at a time the housing industry is already starting to groan under the pressure of rising rates
This is the real issue. But it's why we have an independent central bank. Nobody likes rate rises. It's why economies with weak institutions wind up hyper inflating. (No, we're not.)
Nah I prefer to park my cash in highly volatile equities indexes, a basket of commodities fluctuating madly due to pandemic related effects, or real estate as a hail mary that my wealth won't be inflated to hell. Having central bank rates at 5+% below inflation is basically a nice way of asking people to desperately pump money into any speculative asset they can find before the roaring fire behind it incenerates it.
The bigger the bubble the harder it pops. The harder it pops the more damage it does. The more damage it does the better it is for those who didn't buy into the madness. And I say this as a homeowner.
If the Fed "loses" money by buying high and selling low, it means dollars have been created with no mechanism by which they can be retired, because the Fed has no corresponding assets they could use to exchange them for. This creates permanent inflation/dilution of the currency.
> dollars have been created with no mechanism by which they can be retired, because the Fed has no corresponding assets they could use to exchange them for
Open market operations are one among many of the Fed's policy tools [1].
That seems like a non-sequitur to me. When "quantitative easing" occurs, the Fed buys Treasuries not because it lets the government spend more, but to reduce interest rates and encourage lending.
> The Fed's pandemic actions fueled a housing boom. As it tries to withdraw that support, it could be bad news for housing — and the Fed's standing on Capitol Hill.
I think this article is a bit of a nothingburger. Of course QT has the opposite effect of QE, that's the entire point. The 2020 housing boom will not blow up like in 2008 because today's mortgage backed securities are much more stable than the C-tier CDOs of yester-year, as long as the labor market is doing well (which it seems like it is[1]) and folks can afford their mortgages. Of course house prices may deflate (~20%?) purely out of demand for such high prices decreasing, but imo it's unlikely we will see mortgages go underwater, and therefore the Fed doesn't really have a problem on their hands.
> The 2020 housing boom will not blow up like in 2008 because today's mortgage backed securities are much more stable than the C-tier CDOs of yester-year
CDOs did not blow up the housing market. The housing market blew up the CDO market.
In 2007, people said the exact same thing, and by every single metric the housing market is far more extended than it was then.
> CDOs did not blow up the housing market. The housing market blew up the CDO market.
The two were indistinguishable (CDOs == buckets of over-leveraged mortgages), so I'm not sure what your point is here. No one really knew/cared what was in those CDOs, so people were trading them at face value. I don't think recent home owners are even remotely as leveraged as they were in 2008, so we're not risking a cascading blow-up effect.
House prices went up because of QE + high demand. QT will decrease demand at such high prices, and thus lower prices; we're already seeing this happen due to interest rate hikes. Undoubtedly we'll see some foreclosures, but I don't think it will be a bloodbath.
>> The 2020 housing boom will not blow up like in 2008
This is correct. The current boom will not blow up like in 2008, it will blow up in a new and unanticipated way. Likely due to complex and lightly regulated financial innovations that have grown in size since the last crash.
Agreed. Home buyers 2017+ are pretty leveraged though. Any labor tightening will for sure increase foreclosures in this group. I don't see a run on mortgages. It is funny how people map the past to the future.
If we assume that the home-owners have been building equity in their homes for the past 2 years, no, they would be at 0 + equity. This of course stings a little, but still not underwater or filing for bankruptcy.
I read the article twice an I don't understand the challenge posed by leaving the mortgages on the balance sheet.
I don't think that the fed has wo worry about freeing up the capital to relocate because they printed it into existence in the first place. They also don't want to do more QE because the market is already overheated.
If they can't kill inflation by killing equity markets and bonds the last target left is the housing market. So if you believe that their true goal is to kill inflation at this point, which I more or less do, than the thing the Fed feels like it needs to do is to target housing prices directly and their best lever for that is the MBS on the balance sheet.
I don't get how selling MBS on the market will lower housing prices, housing prices are a result of demand/supply + interest rate affordability, neither of which will be affected by selling MBS' that carry an older lower rate and don't pay out that much. I think it only results in Fed technically losing money.
But if the inflation is not due to overconsumption in the US, but about global problems with supply side issues on the front and China in lockdown not helping at all, how does it make sense to cause a housing crash?
I certainly think the fed should stop to build the bubble, but it should also not go all in and crash everything.
> don't understand the challenge posed by leaving the mortgages on the balance sheet
There isn't one. The Fed wants to tighten financial conditions, and selling mortgages is a good way to do that for the same reason buying mortgages (or more precisely, mortgage-backed securities) is a good way to loosen them. Mortgages are simply more quotidien than e.g. Treasuries, and so could bring novel political risks.
Given that there's nothing forcing the Fed to unload these mortgages, the option of putting them on the market (thus driving commercial mortgage rates higher) seems like a policy lever that will be good to have, cooling real estate inflation selectively separate from the federal funds rate.
Driving rates higher won't cool inflation except by raising prices - which is inflation.
They want to stifle the demand so as to match supply better, but when it's a supply shock and the United States is short something like 3 million houses, it seems a fairly punitive and misguided way to approach solving the problem.
Is this what you would do if you wanted certain classes of people to capitulate on their "American Dream" and turn it into "at least I can rent a house from Goldman Sachs" for some reason?
Yeah I also don't buy the approach and commentary. Rates need to go up sure, but not with this much funfare. Killing the patient in the process to keep inflation in check makes little sense. And then there is the demand elasticity. How many people here are going stop using gas to go to work or stop eating to push prices down? Similarly with the baby formula -- where they suggested throwing money at the problem of lacking formulas: there is just not enough at retail for people to buy, doesn't matter how much money you have. What is the Federal Reserve going to do: tell babies to not eat?
This is misguided politic theatrics, that causes even more panic and over consuming due to panic, which leads to further stress and supply issues.
There's another option that the fed isn't considering: let Congress find a way to force businesses out of congested areas where houses aren't and won't be available any time soon. There's also financially incentivising remote work and providing incentives to move away from major cities.
There's still a supply shortage in building homes to deal with, but that'd at least solve a problem for a good chunk of folks.
I'd be more concerned about the other ~$6.3T of holdings in the Fed's ~$9T balance sheet.[a] The Fed has publicly announced it will allow its bond holdings to mature, to the tune of ~$90B/month, without recycling the proceeds back into treasury and agency-sponsored mortgage-backed bonds.
Given that all treasury bonds that mature and most mortgage bonds paid off via home sales are refinanced, private investors -- that is, mutual funds, ETFs, pension plans, individuals, etc. -- will have to buy an additional ~$90B of bonds every month, give or take, going forward.
That's $1T/year that private investors must find to buy treasury and agency bonds newly issued to refinance old ones.
Without a doubt, this will have a large, persistent effect on treasury yields and credit spreads.
"The Fed's pandemic actions fueled a housing boom. As it tries to withdraw that support, it could be bad news for housing"
How is this bad news? Housing is incredibly expensive relative to the average American's salary. Yeah it sucks for people that bought a house recently, but in the long term, it is absolutely a good thing.
This is how I see it as well. If clean drinking water doubled in price in 2 years would the same people go on CNBC and praise the gains in the "strong water market"?
> If the Fed sells mortgage securities that pay low rates at a time when prevailing rates are much higher, it will incur big financial losses that reduce the funds the central bank returns to the Treasury.
Why does this reduce the amount of funds to the treasury? The losses are on the Feds balance sheet. My understanding is that the Treasury is not involved here, but the article hints at them being affected. Is it implying that treasury yields will rocket higher???
> In that scenario, expect officials to face tough questions from Capitol Hill to explain why they've lost billions of dollars on behalf of the American people.
If the Fed takes a loss, doesn't this mean that base money supply increases? Sure it will be drawing liquidity out of the system, but in the long run, it will leave more money in the system compared to where they started with QE.
> Why does this reduce the amount of funds to the treasury?
It's an accounting thing [1]. When the Fed makes a profit, it remits it to the Treasury [2]. (I believe this is an anachronism from the gold standard days, but not sure.)
The Fed is compounding its mistakes of not stopping QE last year by pulling forward QT in order to fight inflation that is outside of its control (Ukraine and China).
Readit News
This isn't how it works.
No doubt, some will try to spin it that way. But the Fed balance sheet's gains and losses are an accounting artefact. (It will always make money when lowering rates. It will always lose money when raising them. This is close to mathematical fact.) The Fed can't go broke. Its operating metrics are inflation and unemployment.
> the selling would likely push mortgage rates up further, at a time the housing industry is already starting to groan under the pressure of rising rates
This is the real issue. But it's why we have an independent central bank. Nobody likes rate rises. It's why economies with weak institutions wind up hyper inflating. (No, we're not.)
I like rate rises. And I'd like a central bank run by people who didn't default to "nobody likes rate rises" thinking.
For "homebuilders, real estate agents, and other influential industry groups," there is unlikely an upper bound to the support they feel they need.
Open market operations are one among many of the Fed's policy tools [1].
[1] https://www.frbsf.org/education/teacher-resources/what-is-th...
This article is literally about them printing money to buy private assets...
their job is to protect the big banks, the rest is window dressing for TV-americans
I think this article is a bit of a nothingburger. Of course QT has the opposite effect of QE, that's the entire point. The 2020 housing boom will not blow up like in 2008 because today's mortgage backed securities are much more stable than the C-tier CDOs of yester-year, as long as the labor market is doing well (which it seems like it is[1]) and folks can afford their mortgages. Of course house prices may deflate (~20%?) purely out of demand for such high prices decreasing, but imo it's unlikely we will see mortgages go underwater, and therefore the Fed doesn't really have a problem on their hands.
[1] https://www.nytimes.com/2022/05/06/business/economy/jobs-rep...
CDOs did not blow up the housing market. The housing market blew up the CDO market.
In 2007, people said the exact same thing, and by every single metric the housing market is far more extended than it was then.
The two were indistinguishable (CDOs == buckets of over-leveraged mortgages), so I'm not sure what your point is here. No one really knew/cared what was in those CDOs, so people were trading them at face value. I don't think recent home owners are even remotely as leveraged as they were in 2008, so we're not risking a cascading blow-up effect.
House prices went up because of QE + high demand. QT will decrease demand at such high prices, and thus lower prices; we're already seeing this happen due to interest rate hikes. Undoubtedly we'll see some foreclosures, but I don't think it will be a bloodbath.
Both statements are correct because there was a feedback loop.
This is correct. The current boom will not blow up like in 2008, it will blow up in a new and unanticipated way. Likely due to complex and lightly regulated financial innovations that have grown in size since the last crash.
Which is indeed the last shoe that has yet to drop in the current recession.
I don't think that the fed has wo worry about freeing up the capital to relocate because they printed it into existence in the first place. They also don't want to do more QE because the market is already overheated.
I certainly think the fed should stop to build the bubble, but it should also not go all in and crash everything.
There isn't one. The Fed wants to tighten financial conditions, and selling mortgages is a good way to do that for the same reason buying mortgages (or more precisely, mortgage-backed securities) is a good way to loosen them. Mortgages are simply more quotidien than e.g. Treasuries, and so could bring novel political risks.
Which isn't really a problem... because it's impossible for the Fed to get called in the way a bank would if there's a housing crash.
But is probably less than ideal... as it's just weird to have the Fed holding that much mortgage debt directly.
They want to stifle the demand so as to match supply better, but when it's a supply shock and the United States is short something like 3 million houses, it seems a fairly punitive and misguided way to approach solving the problem.
Rates rising drives prices down. Of the mortgages on their books. And of the homes collateralizing them.
This is misguided politic theatrics, that causes even more panic and over consuming due to panic, which leads to further stress and supply issues.
There's still a supply shortage in building homes to deal with, but that'd at least solve a problem for a good chunk of folks.
Given that all treasury bonds that mature and most mortgage bonds paid off via home sales are refinanced, private investors -- that is, mutual funds, ETFs, pension plans, individuals, etc. -- will have to buy an additional ~$90B of bonds every month, give or take, going forward.
That's $1T/year that private investors must find to buy treasury and agency bonds newly issued to refinance old ones.
Without a doubt, this will have a large, persistent effect on treasury yields and credit spreads.
[a] https://fred.stlouisfed.org/graph/?g=PlId
Yes.
> this will have a large, persistent effect on treasury yields and credit spreads
That's the point.
How is this bad news? Housing is incredibly expensive relative to the average American's salary. Yeah it sucks for people that bought a house recently, but in the long term, it is absolutely a good thing.
Why does this reduce the amount of funds to the treasury? The losses are on the Feds balance sheet. My understanding is that the Treasury is not involved here, but the article hints at them being affected. Is it implying that treasury yields will rocket higher???
> In that scenario, expect officials to face tough questions from Capitol Hill to explain why they've lost billions of dollars on behalf of the American people.
If the Fed takes a loss, doesn't this mean that base money supply increases? Sure it will be drawing liquidity out of the system, but in the long run, it will leave more money in the system compared to where they started with QE.
It's an accounting thing [1]. When the Fed makes a profit, it remits it to the Treasury [2]. (I believe this is an anachronism from the gold standard days, but not sure.)
[1] https://www.stlouisfed.org/on-the-economy/2018/september/fed...
[2] https://www.wsj.com/articles/fed-sent-88-5-billion-in-profit...