Interesting disclosure in the footnotes to the Fed's H.4.1 report titled "Factors Affecting Reserve Balances" which some colloquially refer to as the Fed's "Balance Sheet".
The Treasury and Agency securities that the Fed holds and corresponding footnotes read:
Securities held outright (1) 2,630,907 + 12,108 + 13,312 2,668,891
U.S. Treasury securities 1,661,520 + 5,631 - 10,011 1,660,807
Bills (2) 0 0 - 18,423 0
Notes and bonds, nominal (2) 1,577,099 + 5,426 + 1,067 1,575,114
Notes and bonds, inflation-indexed (2) 73,543 + 199 + 6,059 74,740
Inflation compensation (3) 10,878 + 6 + 1,285 10,953
Federal agency debt securities (2) 79,283 0 - 26,626 79,283
Mortgage-backed securities (4) 890,104 + 6,477 + 49,950 928,801
The corresponding footnotes:
1. Includes securities lent to dealers under the overnight securities lending facility; refer to table 1A.
2. Face value of the securities.
3. Compensation that adjusts for the effect of inflation on the original face value of inflation-indexed securities.
4. Guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae. Current face value of the securities, which is the remaining principal balance of the underlying mortgages.
So the Fed carries these securities NOT at "Market Value" and NOT at "Par Value" but at "Face Value". It would also seem that this value is not necessarily the same as the amount that the Fed originally pays for the securities they buy with newly created reserve balances.
For instance, if the Fed pays 100.5 for a US Treasury security with a Face Value of 100, this disclosure makes me believe that they would "book" the securities at 100 on the H.4.1 report and then do an non-directly-related reserve drain of 0.5 in order to result in the Factors balancing out with the new system reserves of 100.
This is perhaps why the Fed seems to buy most recently issued securities in it's "QE" type of operations as those securities would be priced more closely to the Face Value and would require less reserve level adjustments in order to position these amounts on it's Factors report at Face Value, i.e. NOT "Prices Paid" or "Market Value".
See Note 4 in this document for further information.
When you hear loose talk from the morons based on the reasoning of "the Fed can't raise interest rates and remove reserves because the drop in value of their bonds will render them insolvent, their stuck... blah, blah, blah...", as usual don't listen to them. This is apparently NOT the "way it works".
The Fed can certainly raise interest rates at any time without any direct effect on the Factors. And they can concurrently reduce the Factors as well via the normally scheduled US Treasury redemptions and normal MBS prepayments, which to the Fed, effectively result in a "Reserve Drain".
These operations will not cause any negative effects on the Fed's so-called "Balance Sheet".
To the Fed, it's all about interest rate setting; reserve drains, and reserve adds.
That these 3 monetary activities don't have much to do with US macro-economic performance is another story...
32 comments:
Chip, chip, chipping away…
Idiots talking about the Fed and ginning up all this nonsensical fear, meanwhile the Fed has massive profits on its holdings. (Like it needs profits in the first place, but still.)
Can someone tell someone at New Economic Perspectives that there are problems with their MMT primer.
Starting from this page onwards:
http://neweconomicperspectives.org/2011/10/mmp-blog-22-reserves-governement-bond.html
words are stuck together, (stucktogetherlikethis) making it difficult to read, and making it look pretty amateurish. It seems to get worse further on in. The next section is also completely missing ('a debate on debt limits').
I've tried telling them through the comments (a few times, a while ago) but nothing has been done about it.
Mike, Tom?
Mike,
I have a question for you. Do any of the T securities the Fed swap in a QE ever go back to the banks? Or do they sit until maturity?
If there was ever a "shortage" of Treasuries, could the QE'd bonds get resold?
Same with MBS. I assume they will just sit with the Fed until they expire.
you might try e-mailing Devin Smith over there…I think he maintains the site.
http://neweconomicperspectives.org/contact-us
Chew:
Depends on policy. If they want to keep rates low, then those securities probably just mature and roll off. On the other hand, if they raise rates, they'll be selling those.
y said...
Can someone tell someone at New Economic Perspectives that there are problems with their MMT primer.
According to the UMKC web site this is Stephanie Kelton's email. bellsa at umkc dot edu
Mike,
I have a question for you. Do any of the T securities the Fed swap in a QE ever go back to the banks? Or do they sit until maturity?
If there was ever a "shortage" of Treasuries, could the QE'd bonds get resold?
Same with MBS. I assume they will just sit with the Fed until they expire.
Good point. Most people, including the "bond vigilantes" think that the Fed "has to "exit," which will result in a bond bust and soaring yields. The Fed doesn't. They can just hold them to maturity without reversing the present policy if that is the decision of the BOG.
The Fed uses bond purchases and sales solely for monetary policy, which is under the direction of the BOG. The Fed does not have to change direction just to "exit."
Buying bonds takes bonds off the market and makes them scarcer — artificially — and vice versa for selling. That is to say the Fed can create and relax scarcity artificially, which is part of the govts monopoly power wrt the currency.
Right, Tom. The Fed doesn't have to sell the bonds, but they could do so, if they wanted, for monetary policy reasons. At some point, the Fed might actually like to see higher bond yields. Shocking, I know.
I think the average duration of the Feds portfolio is like whatever say 8 years...
So based on a straight line distribution that would take about 15 years to roll off thru redemptions...
1/15th of 3T is 200B/year that should just roll off.
If they sold some securities at less than "face value" they could just use some of the 80B of interest that they currently return to Treasury to instead offset the imbalance this type of sale would cause in the Factors... and dont return any balances to the Treasury imo...
so they could both raise rates and substantially reduce balances at the same time imo...
rsp,
Geoff said...
Right, Tom. The Fed doesn't have to sell the bonds, but they could do so, if they wanted, for monetary policy reasons. At some point, the Fed might actually like to see higher bond yields. Shocking, I know.
Unless the Fed would get really concerned with inflation, the yield curve will be kept low as long as it takes for a housing recovery. If mortgages were to rise, re-fi's would be more expensive, although most have already re-fi'ed, and the monthly would increase on future sales, making housing more expensive. With housing still underwater to the degree it is, and the market so depressed by stagnant incomes and still broken household balance sheets, the Fed is in a pickle to let the yield curve rise. Until the "balance sheet recession" is over, borrowing rates will remain at historical lows.
BTW, the elephant in the room that no one talks about but stinks anyway is the HELOC's — remember home as ATM?
" Until the "balance sheet recession" is over, borrowing rates will remain at historical lows."
Agree Tom, but would take this opportunity to state that just like these morons have been thinking that they have been stepping on the gas while really smashing the brakes, when this thing DOES turn, these morons will be thinking they are stepping on the brakes while really smashing the gas pedal to the floor... and it looks like the Fed has the wherewithal to accomplish this... rsp,
BTW, the elephant in the room that no one talks about but stinks anyway is the HELOC's — remember home as ATM?
This is why I never understood people talking about the "wealth effect" as some purely psychological thing that made people feel richer and prefer to spend more out of their regular income. A notion that always struck me as so much hand waving.
It was a very tangible thing of home equity extracted and spent that left behind debt overhang after the bust.
Matt,my theory is that the Fed is operating for the convenience of FIRE rather than the economy as a whole. It is the only way that their actions make any sense, and they have pretty much admitted that the policy is value asset higher than they would otherwise be.
Right Tom nothing can "clear" at appropriate prices... rsp,
It's pretty clear that the powers that be prefer the economy to recover with private credit expansion rather than fiscal stimulus. But there is no longer any E in HELOC.
We have to wait for the business community to quit hoarding and start investing. How long can you hold your breath?
Looking at Bank Credit it hasnt grown in like 4 years... about 7T in 2008 and about 7T now... so no help from "horizontal money"...
Fiscal has resulted in over 1T per year but like half of that goes external and that which has stayed here is going to the wrong entities if your goal is to kickstart consumption...
WM imo looks like thinks we may be near "turning the corner" on our own via the usual housing and autos...
Seems like Goldman may be thinking the same thing for 2013...
rsp,
I don't know the current state of this question, but many experts seem to be of the opinion that the current interest on reserves laws would allow the fed to institute a negative interest rate - i.e. a tax - which would have the result of vacuuming up reserves without any open market operations or other swaps.
Dan,
I dont know if you saw this but this fellow is looking to start an academic exchange on 'full reserve'... you seem to have been interested lately...
http://clintballinger.edublogs.org/2012/12/18/post-keynesianism-mmt-100-reserves-project-question-1/
rsp,
also Dan,
with a negative rate perhaps they would be able to drain reserve balances but if they are trying to "step on the brakes" via monetary policy they would typically want HIGHER rates...
So going forward, I'm trying to see how they could both raise rates AND drain reserves as they believe (albeit falsely) that both of these activities would be slow down the economy and be dis-inflationary...
If these morons get as carried away on the way up as they have on the way down, we may be able to take advantage of the equities rally of our lifetimes...
rsp,
"We have to wait for the business community to quit hoarding and start investing." - Chewitup
When you say this are you assuming that we aren't going to get any more fiscal than we are getting and maybe less?…which appears to be the case.
Under these circumstances and based on the history of the ratio of household debt to NFA an expansion based on private debt is highly unlikely if not impossible (assuming sound underwriting).
If business is going to invest to get things moving it will have to do so with the expectation of losing money…that's' the only option that will put more money in the pockets of consumers, and the only possible outcome for much investment in this environment.
The distribution of wealth as it is demands it.
At the macro level businesses pay their employees about 2/3rds of what it takes to buy their products…where will the rest come from?
Paul,
You're making my point. If we're going to make a Brad DeLong 2016 bet, a wise one would be a Mosler Muddle.
good analysis paul... another thing is that bank lending is limited by capital... where are they going to get the new capital required to increase bank credit in this environment?
I dont see people lining up to buy bank preferreds... or new shares in a secondary offering... bank capital may be maxed out at these levels of credit...
although I suppose a housing industry recovery could be fomented by the GSEs lending under conventional/conforming mortgages... lately new home sales are still under 400K units which is still in the toilet as far as I'm concerned...
I guess the question is has the 4T+ deficits over the last 4 years been enough to now turn things around?
I guess whoever has those balances can use them to buy GSE issued paper that is created by new home loans... and perhaps new housing sales can take off...
rsp,
May boil down to: Can the economy truly recover next year even without the banks participating?
Can the $T of NFA built up over the last 4 years in the non-financial corporate sector and high end household sector in conjunction with the GSEs create a "shadow banking system" that can kickstart housing and autos and hence a meaningful recovery in 2013?
If so, and the Fed starts to raise interest rates and let it's USTs run off that will only add fuel to the fire and they will keep doing it creating an even bigger boom due to the return of interest income?
rsp,
Two big questions.
1. Is the income there and have household balance sheets improved enough for a credit-driven recovery?
2. Is the banking system in good enough shape to take on the amount of risk needed to finance a credit-based recovery?
I have serious doubts about both. If the govt retrenches, the US economy head into recession. If the govt doesn't continue to support saving desire, including deleveraging, the US economy will limp at best.
If there is a crisis in the EZ, all bets are off. What is the likelihood of the EZ making a recovery. As it is the EZ seems to be in recession, creating a drag on the global economy, including US exports.
There are some big if's out there.
Tom,
Have you seen the GEs Immelt is bitching already about the shitty 4th qtr?
And he is making comments supportive of Communism?
http://www.rushlimbaugh.com/daily/2012/12/11/jeffrey_immelt_communism_works
Immelt: Uh, they have five-year plans. I -- I always tell our team, "Read the 12th five-year plan, "which is the segment we're in. Typically what they're doing makes sense in the Chinese context. That's what they're doin' now. You know, the new president comes in, Mr. Xi comes in, he's got an agenda. They're driving environment, they're driving company reform, they're driving more consumerism that are the right things."
What is Limbaugh to do when these "free market" multinational idiots reveal how they really think....
Rush: "OMG...what about the "free market Immelt?!?"
LOL! What a bunch of morons all of them...
rsp,
Tom,
" Is the banking system in good enough shape to take on the amount of risk needed to finance a credit-based recovery?"
My point is that perhaps horizontal bank money is not needed since so much vertical money has been created over the last 4 years...
with $T of new NFA sitting in bank accounts due to excess reserve policy by Fed, if housing and autos get started due to obligations ratio coming down to manageable levels, then the GSEs could sell bonds to current deposit holders to finance an even further acceleration in housing, etc.... Fed interest raise adds fuel to the fire, etc...
rsp,
Tom -- Those HELOC's are the main reason the big banks are actually insolvent. There are untold billions and they just revalue them to add unpaid amounts in order to claim they are current.
@Chewitup,
I was agreeing with what you wrote, just adding a little detail re the way I see it.
Seems like we have a core group here that doesn't believe in magic, thank God...but there are a lot of wishful thinkers out there whose only hope of being right is luck. :-)
The "tyranny of the arithmetic" is a bitch.
My point is that perhaps horizontal bank money is not needed since so much vertical money has been created over the last 4 years...
Maybe but there has been a lot that has been swept under the rug that we don't know about — yet.
As Warren has said, he looks for muddling along — unless....
The "tyranny of the arithmetic" is a bitch.
A lot of people don't seem to have learned that when they should, like in the fifth grade or before.
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