NY Fed 3-year balance sheet stands at 9 5.9 trillion, missing MBS decline

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WASHINGTON – Stocks of Fed Treasury bonds and mortgage-backed securities will shrink by about $ 2.5 trillion to about 5.9 trillion by mid-2025, when the central bank is expected to close to maintain adequate asset levels. Bank Reserve, New York Fed said Tuesday.

But the most controversial part of that run-off Fed’s portfolio, the $ 2.7 trillion mortgage-backed securities that it currently holds, will hardly be cut. The New York Fed estimates that the share of assets held in MBS will remain fairly stable until 2025, with the central bank still holding about $ 1 trillion of those securities by 2030.

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The Fed wants to completely shift its holdings out of the mortgage market, and the expected slowdown in MBS has prompted some policymakers to call for direct sale of those securities.

The New York Fed’s annual report on open market activity provides a glimpse into how the Fed’s asset holdings, which rose to about $ 9 trillion during the epidemic as it bought assets to stabilize key financial markets, will now evolve as the Fed approves. Shrink the balance sheet.

The New York Fed estimates that by 2024 the monthly fall will be about $ 80 billion.

This fall will last for almost three years, the New York Fed said, at which time the Fed’s holdings could be kept stable, at an estimated 22% of GDP, then increase again in proportion to the economy.

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The reserves required for the banking system are included in the amount, which the New York Fed estimates at about 8% of GDP.

The report also highlighted the risks surrounding the Fed’s transition to a smaller balance sheet as interest rates rise. One of the Fed’s tools to raise short-term market interest rates is to pay more for the bank’s reserve deposit in the Fed. As those costs rise, the Fed’s own holding roll-off means it will earn less on interest payments from its Treasury bonds and mortgage securities.

Under current estimates, the Fed has projected a “significant decline in net income,” the New York Fed said, meaning small profits would be returned to the US Treasury.

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If the rate rises too fast, the Fed could operate at a loss for at least some time, effectively forcing it to print money to pay its bills, and completely stop sending money to the Treasury. In 2021, Fed remittances were over $ 100 billion.

As the market value of securities declines when yields rise, higher interest rates mean the market value of the Fed’s portfolio has fallen, and could be about $ 300 billion less than its face value on paper in the coming year.

Fed officials have acknowledged that if they choose to sell MBS in an environment of high interest rates, they may lose out. However, their treasury investments will be kept until maturity, when the full face value is paid.

(Reporting by Chizu Nomiyama and Nick Jiminsky edited by Howard Snyder)