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Fed Balance Sheet Run-Off Is Smaller Than Caps

Summary:
We’re not sure if we heard Chairman Powell clarify the total balance sheet run-off for 2019, which is important as the pundits are throwing around a number a 0 billion reduction.   Completely false. We project the total run-off in 2019 will be closer to 2 billion, or 73.65 percent of what is being touted. The 0 billion comes from the sum total of the monthly caps of for the SOMA Treasury portfolio and billion for the MBS portfolio. Actual Reduction Is Determined By Maturity Profile. What determines the actual number is the maturity profile of each portfolio. The schedule for the Treasury portfolio is well known but less so for the MBS portfolio due to uncertainty over prepayments.    We use an assumption of 75 percent of the MBS cumulative cap will run-off in 2019,

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We’re not sure if we heard Chairman Powell clarify the total balance sheet run-off for 2019, which is important as the pundits are throwing around a number a $600 billion reduction.   Completely false.

We project the total run-off in 2019 will be closer to $442 billion, or 73.65 percent of what is being touted.

The $600 billion comes from the sum total of the monthly caps of $30 for the SOMA Treasury portfolio and $20 billion for the MBS portfolio.

Actual Reduction Is Determined By Maturity Profile.

What determines the actual number is the maturity profile of each portfolio.

The schedule for the Treasury portfolio is well known but less so for the MBS portfolio due to uncertainty over prepayments.    We use an assumption of 75 percent of the MBS cumulative cap will run-off in 2019,  which is close to the current running rate since quantitative tightening began in October 2017.

Fed Balance Sheet Run-Off Is Smaller Than Caps

Only 4 months In 2019 Will The $30 billion Treasury Cap Be Binding

The profile of Treasury maturities is smaller in 2019 compared to the past 15 months.  For example,  only $11.6 billion of  SOMA Treasury securities mature in January versus the $30 billion cap, which is a big difference from the $30 billion of liquidity that many in the market believe will be taken out of the financial system.

In fact, only 4 months in 2019 will the $30 billion caps be binding,:  February, May, August, and November.

The downside is the FED’s SOMA will not participate in the monthly auctions in 8 of the 12 months in 2019.

Now you know, folks.  Consider it a monetary easing.

Gregor Samsa
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