President Donald Trump has been unabashedly vocal in his criticism of the Fed’s interest rate hikes, but the president has been quiet on another important Fed policy that may also be a big factor behind the rise in longer-term rates that influence all sorts of loans, including home mortgages.
On the surface, the Fed’s slow and steady approach to raising short-term interest rates once a quarter is less aggressive than it’s been in past cycles. But it’s the the Fed’s parallel balance sheet moves that have gone under the radar, except in the bond market where it is closely monitored.
That’s because the Fed has stepped back as a buyer in the Treasury market, at a time when the Federal government is also issuing a mountain of new debt. Since last year, the Fed has been gradually reducing the purchases it makes to replace Treasury and mortgage securities on its balance sheet as they mature.
“Investors are starting to realize just how many bonds are coming at us in the year and two ahead. And I’ve talked about this repeatedly over the last couple of years. We had a budget deficit in the United States that went up from around $600 billion a couple of years ago to now the official number for fiscal ’18 in now over $900 billion. But that doesn’t really capture how much debt is really being added to the national debt in the United States,” said Jeff Gundlach, DoubleLine CEO on CNBC.
Gundlach said there is also a loan to the Social Security system that takes the figure to $1.27 trillion. There are also pension liabilities and veterans benefits.
“On top of that you have the Fed now cranking up quantitative easing to $50 billion a month, which is another $600 billion for fiscal 2019 if they continue on that course. Which takes you to around $2.25 trillion of debt increase. And this is at a time where we’re supposedly in a good economy,” he said. The Fed’s $50 billion a month reduction includes both Treasurys and mortgages.
In an effort to help the economy and add liquidity to markets, the Fed loaded up on those securities during the financial crisis, in a then-controversial program, known as quantitative easing, or QE. The Fed’s balance sheet reached a whopping $4.5 trillion by late 2014, when former Fed Chair Janet Yellen announced an end to the program.
“Most people don’t understand the balance sheet because it’s never happened before. Equities went up because of the quantitative easing…Now they’re selling those assets, what do you think is going to happen now?” said Andrew Brenner of National Alliance.
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